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In this article, I will try to help you understand Options Greeks and use them to your advantage. The Basics First, a quick reminder for those less familiar with the Options Greeks. The Delta is the rate of change of the price of the option with respect to its underlying price. The delta of an option ranges in value from 0 to 1 for calls (0 to -1 for puts) and reflects the increase or decrease in the price of the option in response to a 1 point movement of the underlying asset price. In dollar terms, the delta is from $0 to +$100 for calls ($0 to -$100 for puts). Delta can be viewed as a percentage probability an option will wind up in-the-money at expiration. Therefore, an at-the-money option would have a .50 Delta or 50% chance of being in-the-money at expiration. Deep-in-the-money options will have a much larger Delta or much higher probability of expiring in-the-money. The Theta is a measurement of the option's time decay. The theta measures the rate at which options lose their value, specifically the time value, as the expiration draws nearer. Generally expressed as a negative number, the theta of an option reflects the amount by which the option's value will decrease every day. When you buy options, the theta is your enemy. When you sell them, the theta is your friend. Option sellers use theta to their advantage, collecting time decay every day. The same is true of credit spreads, which are really selling strategies. Calendar spreads involve buying a longer-dated option and selling a nearer-dated option, taking advantage of the fact that options expire faster as they approach expiration. The Vega is a measure of the impact of changes in the Implied Volatility on the option price. Specifically, the vega of an option expresses the change in the price of the option for every 1% change in the Implied Volatility. Options tend to be more expensive when volatility is higher. When you buy options, the vega is your friend. When you sell them, the vega is your enemy. Short premium positions like Iron Condors or Butterflies will be negatively impacted by an increase in implied volatility, which generally occurs with downside market moves. When entering Iron Condors or Butterflies, it makes sense to start with a slightly short delta bias. If the market stays flat or goes up, the short premium will come in and our position benefits. However, if the market goes down, the short vega position will go against us - this is where the short delta hedge will help. The Gamma is a measure of the rate of change of its delta. The gamma of an option is expressed as a percentage and reflects the change in the delta in response to a one point movement of the underlying stock price. When you buy options, the gamma is your friend. When you sell them, the gamma is your enemy. Selling options with close expiration will give you higher positive theta per day but higher negative gamma. That means that a sharp move of the underlying will cause much higher loss. So if the underlying doesn't move, then theta will kick off and you will just earn money with every passing day. But if it does move, the loss will become very large very quickly. You should never ignore negative gamma. Example Lets analyze the Greeks using one of our recent trades as an example: Buy to open 4 ORCL July 17 2015 44 put Buy to open 4 ORCL July 17 2015 44 call Price: $2.66 debit This trade is called a straddle option strategy. It is a neutral strategy in options trading that involves the simultaneously buying of a put and a call on the same underlying, strike and expiration. A straddle is vega positive, gamma positive and theta negative trade. That means that all other factors equal, the straddle will lose money every day due to the time decay, and the loss will accelerate as we get closer to expiration. With the stock sitting at $44, the trade is almost delta neutral. Lets see how other Greeks impact this trade. The theta is your worst enemy as we get closer to expiration. This trade had 44 days to expiration, so the negative theta is relatively small ($3 or 1% of the straddle price). As we get closer to expiration, the negative theta becomes larger and the impact on the trade is more severe. The gamma is your best friend as we get closer to expiration. That means that the stock move will benefit the trade more as time passes. The vega is your friend. If you buy options when IV is low and it goes higher, the trade starts making money even if the stock doesn't move. This is the thesis behind our pre-earnings straddles. Make them Work For You If you expect a big move, go with closer expiration. But if the move doesn't materialize, you will start losing money much faster, unless the IV starts to rise. It basically becomes a "theta against gamma" fight. When you expect an increase in IV (before earnings for example), it's a "theta against vega" fight, and the large gamma is the added bonus. When you are net "short" options, the opposite is true. For example, Iron Condor is a vega negative and theta positive trade. That means that it benefits from the decline in Implied Volatility (IV) and the time decay. If you initiate the trade when IV is high and IV is declining during the life of the trade, the trade wins twice: from the declining IV and the time passage. However, it is also gamma negative and the gamma accelerates as we get closer to expiration. This is the reason why I don't like holding the Iron Condor trades till expiration. Any big move of the underlying will cause big losses due to a large negative gamma. The gamma risk is often overlooked by many Condor traders. Many traders initiate the Iron Condor trades only 3-4 weeks before expiration to take advantage of a large and accelerating positive theta. They hold those trades till expiration, completely ignoring the large negative gamma and are very surprised when a big move accelerates the losses. Don't make that mistake. One possible strategy is to combine vega positive and theta positive trades with vega positive and theta negative ones. This is what we do at SteadyOptions. A Calendar spread is an example of vega positive theta positive trade. When combined with a straddle trades which are vega positive theta negative, a balance portfolio can be created. Conclusion: when you trade options, use the Greek option trading strategies to your advantage. When they fight, you should win. Like in a real life, always know who is your friend and who is your enemy. The following videos will help you understand options Greeks: Related articles: Options Trading Greeks: Theta For Time Decay Options Trading Greeks: Delta For Direction Options Trading Greeks: Gamma For Speed Options Trading Greeks: Vega For Volatility We invite you to join us and learn how we trade our Greek options trading strategies. We discuss all our trades including the Greeks on our options trading forum.

Who Was Karen the Supertrader? Karen Bruton, known better as Karen the Supertrader, is a former hedge fund manager who became famous after multiple appearances on the Tastytrade live show. Bruton started as a novice retail trader who knew virtually nothing about trading and became a multimillionaire in a handful of years. Specifically, she turned $110,000 into $41 million between 2008 and 2011 using basic option selling strategies. Following her massive personal trading success, Karen started a hedge fund called Hope Advisors. Nowadays, Karen the Supertrader is infamous because she was barred from managing outside money by the SEC. According to the SEC’s complaint, Bruton was continually rolling losing positions forward to avoid realizing a loss and thus, in the eyes of the SEC, misleading investors. Because selling options results in immediate income, it’s been the weapon of choice for traders who are hiding large losses. Nick Leeson, a rogue trader who famously brought down Barings Bank, also hid his losses by selling naked options. What Was Karen the Supertrader’s Strategy? Karen the Supertrader’s trading strategy, sometimes referred to as the “KST method,” was based on the concept of theta decay. Her approach involved short selling options with the expectations that they would become worthless upon expiration. By focusing on options that were highly likely to expire out-of-the-money, Karen leveraged the gradual erosion of their time value to her advantage. Karen focused primarily on equity index options on the S&P 500, Nasdaq 100, and Russell 2000. Focusing on a small number of highly liquid symbols allowed her to form a consistent strategy. Her strategy involved selling options that were two standard deviations out-of-the-money with expiration dates ranging between 30 and 56 days to expiration. In other words, these options were roughly 95% likely to expire worthless. As far as systematically selling options goes, Karen’s strategy is par for the course. Most traders who use a similar strategy tend to sell deep out-of-the-money (OTM) options, as they will expire worthless most of the time. The strategy tends to rack up several consecutive winning trades that are relatively small in size with a rare losing trade that will be significantly larger. Karen the Supertrader Trading Rules Let’s take a more granular look at the specific trading rules that Karen the Supertrader has publicly reported using. Firstly, she preferred a short strangle trade structure. This gave her a market neutral market outlook, taking no position on which direction the market will move next. Her only goal with the trade was for the market to remain inside her chosen strikes until expiration or until she closed the trade. Here’s an example of what a short strangle looks like: When it comes to short strangle strike selection, Karen the Supertrader used Bollinger Bands to select her strikes. Bollinger Bands are a technical indicator that plots trading bands two standard deviations away from a moving average. See the chart below for an example: She primarily traded in expiration dates ranging from 25 days to 56 days at the latest. To round up all of these rules, let’s create a rough example of an SPX short strangle trade that Karen the Supertrader might take, based on the rules she’s reported publicly in her Tastytrade interviews: ● Trade type: short strangle ● Put strike: 3875 ● Call strike: 4230 ● Expiration date: June 23 (39 days to expiration) Karen would typically take profits on winning trades, and roll out losing trades to a later expiration. Today she manages 190 million dollars, after making nearly 105 million in profits. Before we start analyzing Karen the Supertrader's strategy, lets be clear: she did NOT make 105 million in profits as TastyTrade claims. That number includes money from new investors. This headline is misleading at best, deception at worst. How much did she really make? We don't really know, but lets try to "guess". With SPX currently at 2075, she would sell May 1825 puts and 2280 calls. This is how the P/L chart would look: So she would get around $700 credit on ~21k in margin. If she holds till expiration and both options expire worthless, the trade produces 3.5% gain in 59 days. That's 21% annualized gain on 50% capital, or ~11% gain on the whole account. This assumes that both options expire worthless and no adjustment is needed. This also assumes regular margin. With her capital, she obviously gets portfolio margin, so her margin requirements are significantly less. But if she wants to take advantage of portfolio margin, she has to sell more contracts, taking much more risk. For the sake of her investors, I hope she is using 50% of the regular margin, not portfolio margin. In any case, I have hard time to see how she can make more than 25-30%/year with this strategy. Don't get me wrong, this is an excellent return - however, by selling naked options, she also takes a LOT of risk. To make 25-30%/year with this strategy, she must use a lot of portfolio margin - which means a lot of leverage. Karen the Supertrader’s strategy is also short gamma and short vega, which means as the market moves against her, the positions become worse at a greater rate. If volatility spikes like it did in 2008, her account will be gone in matter of days. Here are some questions/comments taken from public discussions about Karen SuperTrader: I really have no idea how that is possible. In the TOS platform, if I sell a naked Put, the usual margin required is very large. We’re talking that my short Put usually would yield between 1.5% – 2.5% of the margin required. - I think there is more than a fair chance she may be a fraud and possibly even an invention of TastyTrade. Any manager worth her salt would be happy to provide audited returns, especially if only managing 150 million. She is probably generating around 30% a year while taking a lot of risk. I don’t know if that makes sense in the long run. Another thing that’s strange is the fact there’s not even one chart or table of her performance. I hear a lot of big numbers but just give the facts black on white. This strategy will only work for a period of time. When it stops, the results will be catastrophic. If she was that good as she claims she is, after 7 years of such spectacular returns she would have few billion under management, not 190 million. It’s Finance 101 isn’t it? The higher the return, the higher the risk you have to take. If she is generating 30% or greater per year, she is taking on a lot of risk. Hopefully her investors realize that. Here are some articles about Karen SuperTrader: http://www.optionstradingiq.com/karen-the-supertrader/ http://smoothprofit.blogspot.ca/2012/11/a-glimpse-of-option-strategies-of-karen.html So: IS Karen SuperTrader myth or reality? You decide. June 2016 update: Karen is now being investigated by the SEC for fraud. Don't say we didn't warn you. Read my latest article: Karen Supertrader: Too Good To Be True? Here are the links to the SEC claim and the verdict: https://www.sec.gov/news/pressrelease/2016-98.html https://www.sec.gov/alj/aljdec/2019/id1386cff.pdf I suspect that investors will not learn the lesson from this case. Humans desperately want to believe there is a way to make money with no or little risk. That’s why Bernie Madoff existed, and it will never change. TastyTrade removed all articles and videos related to Karen the Supertrader from their website and YouTube right after the SEC investigation started, but returned them few days afterwards. Karen the Supertrader: Where Is She In 2023? The SEC sued Karen the Supertrader’s hedge fund, Hope Advisors, leading to the hedge fund paying a hefty fine, disgorging of profits, and Karen Bruton’s ban from managing outside money. However, Karen still appears in interviews, like she did with Michael Sartain in 2022. She maintains that the SEC unfairly targeted her firm seeking an easy prosecution. Both Karen and Michael Sartain, the host of the podcast, claim that the SEC’s complaint took issue with the fact that Karen’s hedge fund rolled losing positions forward, a common practice among systematic premium sellers. Her point of view is that the SEC interpreted the fund rolling its losing positions forward as the act of a rogue trader, rather than the routine actions of an options trader who sells premium.

Background Shorting volatility proved to be very profitable historically. The reason is that VIX futures are drifting lower over time, so all you have to do is being short a product that is long volatility (like VXX) or being long an inverse product (like SVXY). Looking at VXX historical chart tells the whole story: So what's the catch? Well, the issue with going short VXX (or being long SVXY) is those occasional big spikes, like the one in 2008. So the trick is to find a strategy that goes short VXX or long SVXY, but at the same time, doesn't lose much during those occasional spikes. This article tells the story of an incredible SVXY trade that was a big winner despite the total collapse of SVXY. Few months ago, SteadyOptions introduced a new strategy called PureVolatility. The portfolio is managed by our veteran member and mentor, Scott Batchelar. Here is an extract from the strategy introduction: Strategy Description We will be looking to hold constant exposure to short volatility while the curve is in significant Contango in an effort to harvest volatility premium. We will also look to go long volatility when the curve is in significant Backwardation and indicators reveal the trend will continue in the short term. Because the curve is in Contango approximately 80% of the time, we will hold short exposure to volatility most of the time. The main strategy to gain this exposure will be through a Collar spread. The PureVolatility model portfolio will be based on total capital amount of $10,000 with a 5% allocation on risk. This is very important as those who are trading in a Reg-T account would on average need $10,000 in initial margin to hold the position even though the risk may only be $500. Portfolio Margin accounts would only require the $500 max loss amount. Reg-T is somewhat antiquated when it comes to margin for a Collar spread. However, this really should not be an issue because if one does not have $10,000 to put aside for this strategy it is probably not appropriate. Furthermore, the increased margin amount will keep members from over allocating to this very aggressive strategy. We will target a risk reward of better than 1:1 for a two week holding period. Here is an example of the Hedged Collar strategy sized for the model portfolio: 100 shares of SVXY at 101.93 Short 1 contract of the 11/10 110 Call at (1.35) Long 1 contract of the 11/10 103 Put at 5.54 Using the above example, here is the P/L chart of the trade: Please note that the profit potential is around $400 and risk around $300. For a strategy that wins around 80% of the time, this is an incredible risk/reward. But it gets even better. One of our other veteran members posted the following comment on the forum: After some discussion, it has been decided to modify the trade and use deep ITM calls instead of the shares. Here is an SVXY "modified" collar entered on January 30 with SVXY at 114: P/L chart: Please notice how using ITM calls instead of shares allows to reduce the risk if the stock makes a big down move. The next day SVXY moved higher and short call has been added. On February 2 SVXY started to move down. By the end of the day on February 5, SVXY went down around 40%. After few adjustments the P/L chart looked like this: The trade was down $750 or 7.5% loss on $10,000. This is completely reasonable, considering that the underlying was down 40%. Any bounce to $90 area should bring the trade back to breakeven. But then black Tuesday came. SVXY opened around $11, 60% down. The calls became nearly worthless, but the puts were the big winners, far outpacing the losses in the calls: Overall this trade produced almost 45% gain on margin or 26% gain on $10,000 portfolio. The bottom line: A trade that was long SVXY, was a big winner after SVXY went down 90%+. This is options trading at its best. And this is the power of our trading community. Read the full description of the PureVolatility strategy here. Related articles: The Astonishing Story Behind XIV Collapse The Incredible Option Trade In VXX The Lessons From The XIV Collapse The Spectacular Fall Of LJM Preservation And Growth

This is a critical issue that many traders don't fully understand. To understand the real risk this lady is taking, I would like you to take a look at Victor Niederhoffer. This guy had one of the best track records in the hedge fund industry, compounding 30% gains for 20 years. Yet, he blew up spectacularly in 1997 and 2007. Not once but twice. Are you Aware of Black Swan Risk? This is how Malcolm Gladwell describes what happened in 1997: "A year after Nassim Taleb came to visit him, Victor Niederhoffer blew up. He sold a very large number of options on the S. & P. index, taking millions of dollars from other traders in exchange for promising to buy a basket of stocks from them at current prices, if the market ever fell. It was an unhedged bet, or what was called on Wall Street a “naked put,” meaning that he bet everyone on one outcome: he bet in favor of the large probability of making a small amount of money, and against the small probability of losing a large amount of money-and he lost. On October 27, 1997, the market plummeted eight per cent, and all of the many, many people who had bought those options from Niederhoffer came calling all at once, demanding that he buy back their stocks at pre-crash prices. He ran through a hundred and thirty million dollars — his cash reserves, his savings, his other stocks — and when his broker came and asked for still more he didn’t have it. In a day, one of the most successful hedge funds in America was wiped out. Niederhoffer had to shut down his firm. He had to mortgage his house. He had to borrow money from his children. He had to call Sotheby’s and sell his prized silver collection. A month or so before he blew up, Taleb had dinner with Niederhoffer at a restaurant in Westport, and Niederhoffer told him that he had been selling naked puts. You can imagine the two of them across the table from each other, Niederhoffer explaining that his bet was an acceptable risk, that the odds of the market going down so heavily that he would be wiped out were minuscule, and Taleb listening and shaking his head, and thinking about black swans. “I was depressed when I left him,” Taleb said. “Here is a guy who, whatever he wants to do when he wakes up in the morning, he ends up better than anyone else. Whatever he wakes up in the morning and decides to do, he did better than anyone else. I was talking to my hero . . .” This was the reason Taleb didn’t want to be Niederhoffer when Niederhoffer was at his height — the reason he didn’t want the silver and the house and the tennis matches with George Soros. He could see all too clearly where it all might end up. In his mind’s eye, he could envision Niederhoffer borrowing money from his children, and selling off his silver, and talking in a hollow voice about letting down his friends, and Taleb did not know if he had the strength to live with that possibility. Unlike Niederhoffer, Taleb never thought he was invincible. You couldn’t if you had watched your homeland blow up, and had been the one person in a hundred thousand who gets throat cancer, and so for Taleb there was never any alternative to the painful process of insuring himself against catastrophe. Last fall, Niederhoffer sold a large number of options, betting that the markets would be quiet, and they were, until out of nowhere two planes crashed into the World Trade Center. “I was exposed. It was nip and tuck.” Niederhoffer shook his head, because there was no way to have anticipated September 11th. “That was a totally unexpected event.” Well, guess what - unexpected events happen. More often than you can imagine. The market bottomed right after Niederhoffer was margin called. By November, the market was back near highs. His 830 puts went on to expire worthless - meaning his trade, had he been able to hold on, turned out to be profitable. But his leverage forced his liquidation. He was oversized and couldn't ride the trade out. Niederhoffer had shorted so many puts that a run-of-the-mill two-day market selloff sent him out on a stretcher. If he had sized the trade correctly, he would have survived the ride and took home a small profit. But the guy was playing on tilt, got greedy, maybe a bit arrogant, and lost all of his client's money. Karen is managing over 300 million dollars now. Her annual returns are in a 25-30% range. Are those good returns, based on the risk she takes? Not in my opinion. I believe that betting 300 million dollars on naked options is a disaster waiting to happen. I'm sure that most of her investors are not aware of the huge risks she is taking. Niederhoffer's story should be a good lesson, but for most people, it isn't. Unfortunately, people desperately want to believe there is a way to make money with no or little risk. Personally, I have hard time to understand why Sosnoff is promoting those strategies. But this is a different story. As a side note, this article is not an attempt to bash tastytrade. It is an attempt to show a different side of the coin and point out some historical cases. If we don't learn from history, we are doomed to repeat it. tastytrade advocates selling premium based on "high IV percentile". They ignore the fact that IV is usually high for a reason. Personally, I consider selling naked options before earnings on a high flying stocks like NFLX, AMZN, ULTA, TSLA etc. as a very high risk trading. tastytrade followers consider those trades safe and conservative. Matter of point of view I guess. Some tastytrade followers argued that PUT Write index performed better than SPX. And it is true. But those are completely different strategies. The original purpose of PUT Write index (or any naked put strategy) is to buy stock at a discount and reduce risk. As long as you sell the same number of contracts as the number of shares you are willing to own, you should be fine, and in many cases to outperform the underlying stock or index. The problem with Karen Supertrader and Niederhoffer was that they used too much leverage. They sold those naked options just to collect premium. Same is true when you sell strangles before earnings. Related articles: Karen SuperTrader: Myth Or Reality? Karen Supertrader: Too Good To Be True? Do You Still Believe in Fairy Tales? Selling Naked Put Options The Spectacular Fall Of LJM Preservation And Growth James Cordier: Another Options Selling Firm Goes Bust June 2016 update: Turns out Karen is under investigation by the SEC. Read the details here and here.

"Maximum profit potential" Few days ago one of the options service providers sent a summary of his 2012 performance, bragging about ~42% average return per trade. A quick look on his website reveals how he calculates his returns: "The highest price the option achieves is recorded as the result since this was historically what the option price reached." Did you get that? Is anyone really able consistently to sell at the top, or even close? Pro-Trading-Options, an independent source which tracks performance of few hundred newsletters, actually stopped tracking this service because they track only profitable services. Turns out that based on real (auto-trading), not hypothetical results, not only the performance was not nowhere near 42% average return, but the service was actually not profitable. Calculating gains based on cash and not on margin This is one of the most outrageous frauds. This is how it works: One of the services makes a lot of risk reversal trades. A risk reversal involves selling a put and using the proceeds to buy a call (or vice versa). The track record includes many 100% losers, but also some ridiculous triple digit returns like 757%, 780% or even 1,150%.You would think that those returns would more than offset the 100% losers. Out of curiosity, I decided to check how they calculated those returns. The 1,150% trade involved buying a $18 call and selling a $18 put for a net cost of $0.04, and closing the trade for $0.50. 1,150%? Not so fast. What they "forgot" to tell us is that selling naked put involves a margin of ~$450 per spread, so $46 gain is really 10% gain and not 1,150%. No wonder they are able to present "4,344% cumulative return since 2007". "Cumulative return" There are a lot of services which make only one trade per month (or per week), yet they present their results as "350% cumulative return since inception". While technically this is correct, does it mean anything? Would you be comfortable placing your whole portfolio (or even half of it) into one weekly Iron Condor? For example, here is a screenshot from one of the services, so you can see how they report returns: Monthly returns: Detailed trades: Of course most people won't look on detailed trades (they are not easily visible like our trades) so they would think that the service makes 12-15% on a regular basis.. When a newsletter claims a 1,000% return for the year, wouldn't you assume that if you started the year with $10,000 and invested in all the recommendations given on the site, they would now have $100,000? But this is not the case. A lot of services calculate their yearly return by adding together all the individual returns on each trade recommended for the year. So, for instance, if a website recommended 100 trades for the year and each trade made 10%, they would claim they made 1000% for the year. The problem is that the returns on trades that overlap cannot be added together. If a service has 5 open positions and each position made 10%, did they make 50%? Of course not, because you could allocate only 20% to each position. So your overall return was 10%, not 50%. Holding losing positions indefinitely Many sites claiming unbelievable win ratios hold trades that move against them for many months while new recommendations continue to be given during that time. To you, it really doesn't matter what other trades are recommended during that time or what alleged returns are made because your capital is tied up. One service that does one trade a month had a losing trade at the beginning of the year that was held the entire year and ultimately closed at the end of the year for a breakeven trade. Yet, during that entire time, new trades were opened each subsequent month. So, they reported a 100% win ratio and a very good return for the year. The problem is that, realistically, you would not have made a dime since all your capital would have been tied up in the losing trade all year. Resetting past returns after a large drawdown One service we know of posts hypothetical results that change each time the service has a bad month. What happens is, when a bad month occurs, they just fix the bad month and post new past performance numbers. Another service has 10 trading programs. When one of the programs has a large drawdown, they simply close or rename it so new members don't see past results. Needless to say that no track record is posted on the website. Having too many open trades Some services claim to have a certain maximum of trades and base the performance on this number. In reality, they open much more trades. There is a service that bases their track record on maximum of 10 open trades and $10,000 portfolio, so members would allocate 10% per trade. In reality, they might have as many as 16-18 trades, with average trade value around $1,400. They have two separate trades in the Open positions section: active trades and "other" open positions. The "other positions are " trades that are still open in the portfolio but are down over 50%. They are on “hold” but are not worth mentioning until they turn around." Needless to say, most of the time those trades don't turn around and end up being 100% losers. Meanwhile, they tie up the capital, but the service continues opening new trades way beyond the maximum number of 10 positions. In fact, with average value of $1,400 and $10,000 portfolio, they should not open more than 7 trades - in reality, they have double most of the time. This is how they were able to claim 700% return in 2012. "90% winning ratio" You will see a lot of services advertising 90% winning ratio. Let me tell you a little secret: some strategies (like selling far OTM credit spreads) have built-in probability of success of 90%. The tradeoff is that the gains are usually very small (3-4%) and you need to hold 3-4 weeks to get that gain. So you win 9 out of 10 trades and lose one time - the big question is how much do you lose on that losing trade. If you made 4% nine times but lost 70% one time, the overall return is negative. Conclusion: winning ratio by itself means nothing. The only thing that matters is the total return. Annualized return When used correctly, an annualized return is the average annual return over a period of more than one year. When used incorrectly, annualized means "we had a good trade so if we continue to make these exact same returns in this same amount of time, we will make X amount by the end of the year." When someone makes a 10% in one week, they can advertise an annualized return of 500%. To achieve that return, they will have to repeat this 10% return every single week. Does anyone believe this is possible? How does SteadyOptions present performance? SteadyOptions does not use any of those dirty tricks. This is how we present our performance: The performance numbers are based on real fills, not hypothetical or backtested trades, and definitely not on "profit potential". We report returns on the whole portfolio, not on what was on risk. We base the model portfolio on 10% allocation per trade which leaves at least 40% of the portfolio in cash. All our trades are clearly presented on the performance page. We base the returns on the required margin, not on cash. We always mention that the returns do not include commissions. Be aware of those tricks before giving your hard earned money to crooks! Start Your Free Trial Related Articles: Why Retail Investors Lose Money In The Stock Market Are You Ready For The Learning Curve? Can you double your account every six months? How to Calculate ROI in Options Trading

Our performance reporting is on the whole account and based on real fills. We put our money where our mouth is. Our members already know that we execute all trades that we share with members in our personal accounts. You can read here what our members think about us. But today I'm going to take one more step toward complete transparency. I'm going to provide an additional reference to the current and prospective members and share with you my personal account performance. I'm going to show you the summary of my actual 2015 account statement, directly from my broker. Here it a screenshot from my broker's 2015 statement: Just to be clear, I have several accounts trading/investing different strategies, but this account is exclusive to trades that I share with my SteadyOptions and Steady Condors members. It uses a very conservative allocation of 5-7% for SteadyOptions trades and 15-20% allocation for Steady Condors trades, leaving around 30-50% of the account in cash on average. I followed the same allocation guidelines that I share with my members and started with account value consistent with what majority of our members allocate to our services. As you can see, the account return was 80.2% in 2015. You might have the following questions after seeing my performance: Q: Why are you revealing your personal performance? A: My goal is to show you that SteadyOptions performance is not a myth or hypothetical performance. By showing you my real numbers, I want you to see what is possible to earn by trading options if you have the patience, the discipline and the perseverance. I also want to silence the doubters who claim that I don't trade with real money. Q: Will I be able to replicate this performance if I subscribe to SteadyOptions and/or Steady Condors? A: That depends. If you just started trading options, then most probably the answer is NO. It will take time. I know this is not what people want to hear, but that's the truth. If you have some experience and spend the time to learn our strategies, then I see no reason why not. In fact, some of our members do better than our official performance. Q: Is 80% per year really that good? A: You might see sales pages showing you 200%+ returns on some cheap options they bought. But what they don’t tell you is that those trades happen once in a while and are not consistent. The real question is not how much you made on few isolated trades, but how much you made on the whole account. Performance Reporting: The Myths and The Reality shows a lot of examples of performance manipulation, so be careful. Q: How much risk did you take to achieve this performance? A: Trading is a risky business in general. However, we implement advanced techniques to reduce risk. For example, the Steady Condors trades are hedged and protected much more than "standard" Iron Condor trades. In SteadyOptions portfolio we balance the trades in terms of the Greeks to reduce risk. Position sizing also plays a big role. But those techniques can only reduce risk, not eliminate it. This is why I still don't recommend allocating more than 20-30% of your net worth to options trading, especially if you have big portfolios. Q: Can you achieve similar performance with $1,000,000 portfolio? A: NO. It is a well known fact that achieving very high performance numbers becomes more difficult as your account grows, for various reasons. One of the issues is liquidity, and this is why I don't recommend allocating more than $100,000 to SteadyOptions. Q: What is the impact of commissions on performance? A: As you can see, even with cheap broker, I still paid over $16k in commissions in 2015, which reduced the performance by ~20-25% per year. Commissions is the cost of doing business, but you should do whatever is possible to reduce them. Brokers and Commissions discussion can help you to pick the right broker. 2020 update: with availability of brokers like RobinHood, Tradier etc. the impact of commissions is much less than it used to be. Q: Why your performance page presents much higher returns for SteadyOptions service compared to your personal account performance? A: Few reasons: The performance on the performance page excludes commissions. My account traded mix of SteadyOptions and Steady Condors strategies and Steady Condors performance is lower. I kept relatively large portion of the account (around 30-50%) in cash most of the time. I might use slightly different allocation. I might execute some trades in my personal account that I don't share with the members, for various reasons (liquidity, higher risk etc.) Generally speaking, my personal account performance might be different from the official performance for the reasons outlined above. Q: Do you trade other strategies besides SteadyOptions and Steady Condors? A: This specific account is exclusive to SteadyOptions and Steady Condors strategies only. I have other accounts (retirement account, corporate account etc.) where I have longer term investments, including Anchor Trades strategy. I also have some Real Estate investments. Q: I would love to join, but I have a full time job and no time to dedicate to trading. Why don't you offer auto-trading? A: SEC considers newsletters that engage in auto-trading to be investment advisers, and I am not licensed to be an investment adviser. So most newsletters that engage in auto-trading are breaking the law and are exposed to lawsuits like this one. You can read more details here. Please let me know if you have any questions. I invite you to try our services and see how we can help you to become a better trader. I'm not going to promise you the Holy Grail. What I can promise you is that if you are willing to work hard and learn the craft, the sky is the limit. Watch the video: Start Your Free Trial *** Free trial is for new members only ***

When the loss has been reported, this is how it looked like: And then the fund suffered another, 54.6% fall to $1.94 a share on Feb. 6—a two-day total decline of 80%. “It may be the biggest two-day drop for a mutual fund ever,” says Gretchen Rupp, a Morningstar analyst who covers the fund. Like mountain climbing itself, the reality proved far scarier—especially for a fund with “preservation” in its name. “The fund sold naked put options on S&P 500 futures,” says Rupp. “It was leveraged and had above-average margin [borrowing] levels.” A put option is a contract that allows its buyer to sell a security at a specified price, the strike price. This allows the buyer to hedge a position or an entire portfolio; if the price of the security falls below a certain level, the option buyer will at least make money on the option. When an institution “writes” or sells a put option to a buyer, the seller is betting that the price will stay higher than the option price. When the seller doesn’t own the actual securities on which it is writing options, that is called “naked” option writing, and it amplifies downside risk. Standard & Poor’s 500 option prices are determined in part by market volatility; the more volatile the market, the more likely the option will hit its strike price and become profitable. LJM was betting that the market wouldn’t become too volatile—a strategy known as shorting volatility. “The VIX [volatility index] spike on Monday was the sharpest spike in history,” Rupp says. The VIX more than doubled from 17 to 37. So leveraging the fund’s bet against it proved disastrous. According to LJM’s prospectus, the fund’s investment objective is to seek “capital appreciation and capital preservation with low correlation to the broader U.S. equity market.” Nothing in that statement proved true on Feb. 5. “This fund should never have been marketed to fund shareholders as a tool for capital preservation,” Rupp says. As someone mentioned: "Short volatility strategies, selling options and collecting premium, have been critically described as picking up dimes in front of a steamroller," wrote Don Steinbrugge, the founder and CEO of Agecroft Partners, a hedge-fund consulting firm, in a blog post. "They generate very good risk adjusted returns until volatility spikes and then have the potential to lose most of their assets if not properly hedged." This is not accurate. Those strategies can produce very good returns if used properly. What most experts are missing is the simple fact that the problem is not the strategy. The problem is leverage. Strategies don't kill accounts. Leverage does. I did some simulations of how those strategies would perform on Feb.5 without leverage. Using different strikes and expirations, the fund would be down around 10-15%. Not pleasant, but survivable. I can’t even imagine how much leverage they used to be down 56% in a single day. LJM Preservation and Growth Fund was not the first to fall into the leverage trap. We all still remember the story of Karen Supertrader who suffered significant losses due to excessive leverage. I described what happened there in my articles Karen The Supertrader: Myth Or Reality? and Karen Supertrader: Too Good To Be True? Another famous case of excessive leverage was Victor Niederhoffer. This guy had one of the best track records in the hedge fund industry, compounding 30% gains for 20 years. Yet, he blew up spectacularly in 1997 and 2007. Not once but twice. Are you Aware of Black Swan Risk? This is how Malcolm Gladwell describes what happened in 1997: "A year after Nassim Taleb came to visit him, Victor Niederhoffer blew up. He sold a very large number of options on the S. & P. index, taking millions of dollars from other traders in exchange for promising to buy a basket of stocks from them at current prices, if the market ever fell. It was an unhedged bet, or what was called on Wall Street a “naked put,” meaning that he bet everyone on one outcome: he bet in favor of the large probability of making a small amount of money, and against the small probability of losing a large amount of money-and he lost. On October 27, 1997, the market plummeted eight per cent, and all of the many, many people who had bought those options from Niederhoffer came calling all at once, demanding that he buy back their stocks at pre-crash prices. He ran through a hundred and thirty million dollars — his cash reserves, his savings, his other stocks — and when his broker came and asked for still more he didn’t have it. In a day, one of the most successful hedge funds in America was wiped out. Niederhoffer had to shut down his firm. He had to mortgage his house. He had to borrow money from his children. He had to call Sotheby’s and sell his prized silver collection. A month or so before he blew up, Taleb had dinner with Niederhoffer at a restaurant in Westport, and Niederhoffer told him that he had been selling naked puts. You can imagine the two of them across the table from each other, Niederhoffer explaining that his bet was an acceptable risk, that the odds of the market going down so heavily that he would be wiped out were minuscule, and Taleb listening and shaking his head, and thinking about black swans. “I was depressed when I left him,” Taleb said. “Here is a guy who, whatever he wants to do when he wakes up in the morning, he ends up better than anyone else. Whatever he wakes up in the morning and decides to do, he did better than anyone else. I was talking to my hero . . .” This was the reason Taleb didn’t want to be Niederhoffer when Niederhoffer was at his height — the reason he didn’t want the silver and the house and the tennis matches with George Soros. He could see all too clearly where it all might end up. In his mind’s eye, he could envision Niederhoffer borrowing money from his children, and selling off his silver, and talking in a hollow voice about letting down his friends, and Taleb did not know if he had the strength to live with that possibility. Unlike Niederhoffer, Taleb never thought he was invincible. You couldn’t if you had watched your homeland blow up, and had been the one person in a hundred thousand who gets throat cancer, and so for Taleb there was never any alternative to the painful process of insuring himself against catastrophe. Last fall, Niederhoffer sold a large number of options, betting that the markets would be quiet, and they were, until out of nowhere two planes crashed into the World Trade Center. “I was exposed. It was nip and tuck.” Niederhoffer shook his head, because there was no way to have anticipated September 11th. “That was a totally unexpected event.” Well, guess what - unexpected events happen. More often than you can imagine. But when we give our hard earned money to professionals to manage them, we expect better. LJM Partners had a solid long term reputation. Till Feb.05. As Warren Buffett said - "It takes 20 years to build a reputation and 5 minutes to ruin it. If you think about that, you’ll do things differently.” If you liked this article, visit our Options Trading Blog for more educational articles about options trading. Related articles Karen SuperTrader: Myth Or Reality? Karen Supertrader: Too Good To Be True? How To Blow Up Your Account James Cordier: Another Options Selling Fund Goes Bust

This can be seen in historical market data, and from an efficient markets point of view, should be expected to persist in the future as a rational risk premium for the transfer of risk from a willing buyer to a willing seller. Stop and think with me for a moment about the concept of passive vs. active. I believe it's wise to only invest in strategies ("factors") with an underlying expected return, before any active management is applied. In other words, the market naturally makes you money over time without any requirement of an investment manager's "skill" to be able to select securities and/or time entries and exits. This is important because academic research has documented manager skill in decades of historical mutual fund performance to exist less than would even be randomly expected (especially after fees and taxes). As an example of a passively managed VRP strategy, the CBOE has been publishing their S&P 500 Put write index for years, with historical data going back to 1986. Since then, a passive strategy of selling fully cash secured one-month at the money (ATM) S&P 500 puts, with collateral assumed to be held in a money market account holding US Treasury bills, would have produced returns similar to the S&P 500 index itself. Due to the nature of ATM puts, risk (measured as volatility and drawdown) was less than the underlying index, resulting in about a 30% increase in Sharpe Ratio. Put selling is robust across markets as well, as can also been seen in CBOE's historical data for PUTR, where the same methodology is applied to the Russell 2000 index. With liquid option markets on ETF's like EFA and EEM, a globally diversified equity put write strategy could be constructed with attractive characteristics vs. a traditional mutual fund or ETF that only holds the underlying equities. (Readers can backtest these ideas for free for an entire week with a free trial of the highly recommended ORATS Wheel) Last month, AQR published an excellent paper, Understanding the Volatility Risk Premium. The paper's executive summary is presented below: The authors also present an interesting case study of how investor behavior tends to create significant demand for and value placed on insurance like investments, such as buying puts to hedge a position or portfolio. These preferences and behavioral biases cause an overestimation of downside risk, documented by a Yale University survey conducted where both retail and institutional investors were asked to estimate the probability of a "catastrophic stock market crash" within the next six months. Since 1989, with few exceptions, a majority of both groups consistently believe that there is a greater than 10% chance of such, yet in reality the historical likelihood of such an event has been approximately 1%. This overestimation of crash risk may be part of the explanation of the persistent VRP seen in option and volatility futures pricing where option and volatility futures buyers are willing to pay, and sellers require receipt, of a large premium to transfer risk from one party to another. On the opposite end of the option spectrum is call options, where the VRP has also been documented to exist (and can be seen in CBOE's BXMD index in the chart above), although for slightly different reasons. Call options can be thought of as lottery tickets, where a buyer spends a small amount of money to have the potential for a large payoff if the underlying asset moves much farther and faster to the upside than the market expected. This preference for positive skew results in a call option VRP that can also be captured by option sellers in a variety of different ways, including covered calls and short strangles where short puts and calls are combined into one (usually) delta neutral position. I'll finish with the conclusion from AQR's paper, but before I do, a word of caution. The reason you often hear "options are risky" is because people often are under-educated about the inherent leverage built into options. Remember, one contract is the equivalent of 100 shares of the underlying. Don't rely on your broker's margin requirement as any indication of how many contracts you should sell any more than you'd rely on a sports car's ability to drive 180 MPH as any indication of how fast you should drive. In our firm, we believe that any skill that may persist in financial markets is in having a deep understanding of portfolio construction, and then the discipline to have a long term mindset when most others don't. Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse oversees the LC Diversified forum and contributes to the Steady Condors newsletter.

The options, by themselves, are not dangerous tools. I mention that because one of the long-lasting misconceptions about options is that they are dangerous to use. It is possible to use options to speculate (gamble), but options were created as hedging, or risk-reducing, investment tools. An alarming number of financial professionals, including stockbrokers, financial planners and journalists are in position to educate the public about the many advantages to be gained from adopting naked put writing (and other option strategies), but fail to do so. Many public investors never bother to make the effort to learn about options once they hear negative statements from professional advisors. Except for extremely bearish prognosticators, no one ever suggests that owning stock is anything but the most prudent of investment strategies. Yet, writing naked puts is a significantly more conservative strategy and definitely less risky than simply buying and owning stocks. As such it deserves to be considered as an attractive investment alternative by millions of investors. Who should consider writing naked (uncovered) puts? 1. Investors Who are bullish on the market Who are bullish on specific stocks Who want to buy a specific stock at a lower price Who adopt a buy and hold strategy Who want additional income from their holdings 2. Traders Who want a higher percentage of winning trades Willing to consider holding a position for a month or two Who want to begin a spread position with a bullish leg Strategy Objective Why would you want to write naked puts? What is there to be gained? Writing naked puts is a bullish strategy. When selling naked put options, you are attempting to achieve one of two investment goals Profit. You are bullish on the stock and expect the put option to lose value, and perhaps expire worthless as time passes. If the latter happens, the option premium (cash from selling the put option) becomes the profit. Buy stock at a discount. If the put option is in the money when expiration arrives, you will be assigned an exercise notice and be obligated to buy the stock you want to own at a discount to today’s price. This is an intelligent method for an investor to gradually add positions to a long-term portfolio. NOTE: When you are eventually assigned that exercise notice, the stock may be below your target purchase price. However, if you had entered an order to buy stock at that target price, you would be in worse shape than the put seller (who cushioned any loss by the amount of the premium). Another alternative is combining put selling with call selling, a strategy known as the Wheel strategy This post was presented by Mark Wolfinger and is an extract from his latest book Writing Naked Puts (The Best Option Strategies). You can buy the book at Amazon or sign up for our free trial and get it for free. Mark Wolfinger has been in the options business since 1977, when he began his career as a floor trader at the Chicago Board Options Exchange (CBOE). Mark has published four books about options. His Options For Rookies book is a classic primer and a must read for every options trader. Mark holds a BS from Brooklyn College and a PhD in chemistry from Northwestern University.

Lets take a closer look at position sizing and why it is critical for your financial health. How much should one allocate to any given trade? The 2% – 6% rules have been introduced in Dr. Alexander Elder's book "Come Into My Trading Room". The 2% rule is to protect traders from any single terrible loss that can damage their accounts. With this rule traders risk only 2% of their capital on any single trades. This is for limiting loss to a small fraction of accounts. Besides a disastrous loss, a series of losses can also damage traders' account. The 6% rule is lent to handle this. Traders have to set the maximum of accumulated loss for a month. When they reach that level of loss, they have to stop opening any new position for rest of the month. These 2 rules are designed to protect traders from the two types of losses. For those who are able to accept the higher risk, they might adjust the 2% – 6% rules to 5% – 10%, where the 5% is used to protect the account from any single disastrous loss while the 10% rules is used to protect traders from any series of losses in each month. With our earnings straddles, if you limit your holding period to 3-6 days and don't hold through earnings, it is very unlikely to lose more than 20% in a single trade. In fact, most of our losers are in the 5-7% range. If you adapt the 2%-6% rule, then you can allocate 10% per trade, knowing that you don't risk more than 2% of your account. You can adjust it after each trade, monthly, quarterly, etc. It depends on your risk tolerance. Adjusting monthly seems like a good compromise. Of course theoretically, any options trade can lose 100%, but for some strategies, it is very unlikely. You should usually account for a "reasonable" scenario when considering your position sizing. The general idea is knowing in advance how much you risk on any given trade and allocate the capital accordingly. If it is absolutely critical for you not to lose more than 2% per trade, you can set a stop loss of 20% per trade. I personally don't do it for two reasons. First, many times you have couple of days of theta with flat IV and then IV jumps, reversing the loss. Second, with spreads, your fills are going to be terrible if you place stop loss order, much worse than you could get with limit orders. And third, like I mentioned, the loss is very unlikely to be more than 20% anyway. How many contracts should you trade? Position Sizing - The Most Important Trading Rule article has a good explanation of the concept. I’m not sure about you. But I’m tempted to borrow as much money as I can from my family, extended family, friends, friends of friends, and my banker. Not to mention selling off my retirement portfolio and using the highest leverage my broker offers. I’m tempted to enter the market with as many contracts as I can. Yet, this is a temptation that I MUST resist. This is because there is a 1% chance of losing everything. If this loss occurs, it is one that I can never recover from. Not only will my broker and banker be after me, I will find creditors instead of friends. It is a catastrophic loss. Here is another way to look at it. Lets say you have a trade which you keep through earnings and require the stock to move about 5% to realize the maximum profit. If it happened, you would realize a 40-45% gain, depending on your entry price. The trade would be profitable 8 out of 10 last cycles. However, when the stock moves less than expected and doesn't reach the long strike, the trade is a 100% loser. In comparison, you can have trades which are sold before earnings, producing an average gain of 8-12%, with very limited risk. It is very rare for those trades to lose more than 7-10%. What is better – to make 8 times 40% and to lose 2 times 100% or to make 10 times 10%? In the first case, your accumulative return is 120% (12% per trade). In the second case, it is “only” 100% (assuming 10% per trade). But here is the catch: those returns don’t account for position sizing. Let’s assume you want to risk 2% of your portfolio per trade. In the first case, you know that you will win most of the time, but when you lose, you can lose 100%. So you can allocate maximum of 2% of your account per trade, which gives you a total portfolio return of 24%. In the second trade, you can rarely lose more than 7-10%. The maximum loss I had with those trades was around 20%. So you can easily allocate 10% per trade, which gives you a total portfolio return of 100%. Now you see the difference? With the second trade, I can have much smaller average returns, but with proper allocation, I’m still way ahead. Despite all your efforts, you will eventually have a streak of 4-6 losers. Those who tell you they haven't, are either lying or haven't been in the game long enough. Always ask yourself: How will your account look after 5 straight losers? As a general guideline, I always recommend starting small. Allocate maybe 5-7% per trade and then increase it gradually. Always keep some cash reserve (I recommend at least 20-30%). As for total account size - do it gradually as well. Prove yourself that you can make money with 10k. Do it for 2-3 months. Then increase to 20k. Don't increase from 10k to 100k. The markets will be there long time after all of us are gone. Dr. Van Tharp has some very good articles about position sizing. I would highly recommend his books to learn more on the subject. How we use position sizing in our model portfolio In our model portfolio, we allocate 10% per trade. Since most of our trades risk around 25-30% (there are some exceptions), we basically risk up to 3% of our portfolio in each trade. In some strategies (like trades that we hold through earnings) we allocate half position, or 5% of the portfolio per trade. Those are higher risk trades that can potentially lose 50-80%. "Profits come in bunches. The trick when going sideways between home runs is not to lose too much in between." - Michael Covel Recommended reading: Van Tharp’s Definitive Guide To Position Sizing Money Management Strategies for Futures Traders A Trader’s Money Management System: How to Ensure Profit and Avoid the Risk of Ruin Want to learn how to trade options in a less risky way? Start Your Free Trial

After all, option positions are usually held until something happens. For example, the stock moves or time passes, or volatility changes etc. Any decision to exit (or hold or adjust) the position should be based on the current risk of the position. In other words: If you want to own the position as it is, then own it. If risk is too large, or profit potential is too small, or it you are not comfortable with the current trade, then do something: adjust, reduce size, or exit. If that play locks in a loss, so be it. That is not of primary importance. Any position that you hold must have the potential to earn enough cash to justify the risk associated with holding. Estimating the probability of success is one factor to consider when making the hold/fold decision. As long as risk is not too high – and that's most of the time – traders who sell time premium (trading iron condors for example) collect their profits as time passes. To be a profitable trader, you take your profits as they come, accept losses when that's the best decision, but don't concentrate on those factors. Instead, the key, and the most important item on which to focus is risk. That's the risk management skill that prevents large losses. That in turn translates into exiting risky positions, regardless of whether they are profitable or currently under water. Being willing to do whatever is necessary to get out of dangerous positions is the winner's mindset. Those who do not agree argue that failing to pay attention to whether a position is profitable before exiting gives the trader little chance for success. The thought is : If you don't trade for profits, how can you ever know when to exit a position? Here is a note from Christopher who takes the other side of my argument: *** Mark, The theory that profit and loss doesn't matter naturally assumes that you have a "perfect" assessment of the odds of a given trading position. In an imaginary world, whereby "current risk" can be measured to perfection, prior gains and losses never matter because we can always mathematically control our risk of ruin. In the real world nobody can perfectly gauge "current risk" and hence ignoring prior gains and losses can lead to ruin. Stop losses should be employed when we have reason to believe that our measure of "current risk" is in error. If you disagree, look up "Long Term Capital Management" for further evidence. Christopher Cole from Artemis Capital *** Hello Christopher, In discussing what role current profitability should play in deciding when to exit a trade, I was offering my opinion on how traders should manage position risk. The idea is that the inexperienced trader would benefit by following this advice because it overcomes a common blind spot. I was also hoping that the experienced trader may discover something he/she had previously overlooked. My point is simply this: Do you want to own any given position, right now, at its current price and under current market conditions? Nothing else matters. If you have no desire to own it, I strongly recommend closing. If that results in a loss, then that's the way it has to be. That's far better than continuing to hold a risky trade – planning to exit as soon as the trade turns profitable. I noticed a very timely blog from Felix Salmon regarding the US Government's decision to sell some of its shares of General Motors at the IPO price: "The next big tranche of bailout repayment funds, of course, is going to arrive tomorrow, with the upsized GM IPO. The size of the stake that Treasury’s selling has been growing impressively, and at this point it looks as though taxpayers are going to end up owning just 33% of GM, down from 61% right now. The more shares that the government sells in the low $30s, of course, the harder it’s going to be for Treasury to realize an average price of $44 per share for its stake by the time its last share of stock has been sold. That’s the point at which the government breaks even on the deal. But I’m glad that Treasury isn’t letting such considerations stop it—holding on to stock just because it’s trading below some arbitrary 0% return figure is simply speculating in the stock market, and it’s not Treasury’s job to be a stock-market speculator." You don't have to agree, but this discussion is hardly comparable to LCTM. I'm not talking about adding to the trade in gigantic size. They were absolutely certain that they were correct in their assessment. They grew the position size. They refused to believe that what they were seeing was real. And they had no real conception of risk because their risk-evaluation model was flawed. In their (brilliant) minds, they ignored one very basic principle for traders: "Markets can remain irrational longer than you can remain solvent." [John Maynard Keynes] Every trade eventually requires a hold/exit decision. When using options, an additional choice becomes available: hold through expiration. I don't believe it's a good idea to hold a loser, just because it is a loser. There's a time to own a position (potential reward justifies the risk) and there is a time to get out (risk too high when considering potential gain). I am certain that you recognize that not every trade can be a winner. Thus, holding losers with the hope of making every trade profitable is not viable. First, it will never happen. Second, traders would hold any poor (risky) position simply because he/she refuses to take a loss. I believe that a good trade decision does not have to take into consideration whether the current trade is showing a profit or loss. I'm not saying that you must ignore that factor (I ignore it), but it should not be the primary factor in your exit decision. Nor does the decision have to depend on an accurate assessment of future prospects. However, current risk is easy to measure when a trader adopts limited risk and limited reward strategies. I always know the best and worst possible scenarios and trade to avoid the worst case. To me, decisions cannot get any easier than that. How else can a trader manage risk? I either want this position in my portfolio or I don't. I may be unable to make a perfect assessment of the probability of winning, but I know how much can be won and lost. Why hold a trade when you have a negative opinion of future prospects? Just so you don't have to lock in a loss? That makes no sense to me. Here's an example of my bottom line: You can exit a specific trade by paying $100. How can it matter whether you sold this position and collected $200 (and would have a profit) or $50 (and would have a loss)? Do you want to own it or not. The price is $100 right now. Nothing else matters.. Christopher, I believe this is a matter of perspective. And apparently we have different perspectives. There's nothing wrong with that. Thanks for writing. Mark Wolfinger has been in the options business since 1977, when he began his career as a floor trader at the Chicago Board Options Exchange (CBOE). Since leaving the Exchange, Mark has been giving trading seminars as well as providing individual mentoring via telephone, email and his premium Options For Rookies blog. Mark has published four books about options. His Options For Rookies book is a classic primer and a must read for every options trader. Mark holds a BS from Brooklyn College and a PhD in chemistry from Northwestern University.

They Are Properly Capitalized – A very common mistake for beginner traders is not being properly capitalized. Beginners see the power of leverage option trading offers and think they can turn $2,000 into $20,000 in a matter of weeks. Before they know it, a couple of losing trades have completely wiped out their capital. I must admit I was also guilty of this. I was living in Grand Cayman and had just started options trading. I think in my first 6 months I broke just about every trading rule possible. I had a couple of small positions in the Australian stock market, one a utilities company and the other a REIT (real estate investment trust). Both of these positions had a low beta, meaning that the stocks did not move as much as the general market. So, through lack of knowledge and understanding I thought I would sell some call options on the main ASX index to hedge and protect my long positions. I obviously didn’t understand my net exposure was now hugely short as the short calls easily outweighed my stock holdings. Sure enough the market rallied, I refused to admit my mistake and take my losses and hoped and prayed that the position would come back my way. Next thing you know my capital has been completely wiped out and I had to send money via Western Union and have my brother deposit the money in my account the next day. Not a great experience for me, but one that I certainly learnt from! They Have A Low Tolerance For Risk – Another important aspect of successful options trading is having a low tolerance for risk. The best options traders will only trade when there is a low risk high reward scenario. They want to have the odds skewed in their favor as far as possible. The best option traders will not try to hit home runs with every trade.o the Stock Repair Strategy They Trade Only When The Market Provides An Opportunity – One quality all great traders have is patience. Successful investors will only enter into trades when the odds are stacked in their favor. They would much rather be the house rather than the average guy on the street trying to win big. They are focused on the bigger picture and are willing to wait and have the patience to only trade when the right opportunity presents itself. Some of the best traders often talk about sitting idle and just watching the markets, waiting for the perfect time to make a trade. Amateur investors find it very hard to not trade and are captivated by all the red and green numbers on their screen and feel like they are missing out on the action. Can you think of times in your trading when you have experienced this? Are you able to sit on the sidelines and just watch the market without jumping in? Knowing what cycle the market is in, is key to knowing when to trade and which trades to make. The best resource if have found for knowing what cycle the market is in is Investor’s Business Daily. Each day they publish a Big Picture article which states whether the market is in a confirmed uptrend, the uptrend is under pressure or if he market is in correction. I have found them to be incredibly insightful and you would do well to follow their advice. Their advice is to only buy strong stocks when the market is in a confirmed uptrend and this has been a time tested method for market outperformance. While it’s still possible to make money on the long side while the market is in correction, the odds are stacked against you and you would only want to be buying leading stocks such as those in the IBD 100. They Have A Trading Plan – Before opening an account, everyone should have a trading plan. This shouldn’t just be something in your head either, you need to write it down! By writing it down, it is clearly defined and you can refer back to it at any time. It will also be more real if you write it down and you’ll be much more likely to stick to it. Like anything in life, in order to be successful you need to have a plan and think things through rather than just flying by the seat of your pants. When I first started trading I would just place random trades based on how I was feeling at the time. I’d put on a bull call spread, then I’d try shorting stocks I thought were over valued and then I’d be making volatility trades. Needless to say I was not very successful during this time. While some of my trades were winners it was like I was taking 1 step forward and 2 steps back. All the great traders have a clearly defined trading plan. This is crucial to your success as a beginner options trader. They Have A Risk Management Plan – Only trade what you can afford, don’t risk money you can’t afford to lose. Trade defensively, rather than think of what you can make, every time you make a trade you should be thinking about the worst case scenario. What could you lose and how you are going to handle the position if things go badly? Beginner traders have trouble getting a handle on how much to risk on each trade. When starting out you do not want to have 90% of your capital tied up in one trade. One thing for beginner traders to consider is to split your trading capital in half, place half in an interest bearing account and use the rest to trade. This way, no matter what happens, you will never lose all of your capital. Another good risk management rule is to set a fixed percentage of you capital as your risk per trade. A common method would be to set 5% as the maximum capital to risk per trade, but for beginners you could even make that lower. Once a trade is placed you need to continue to monitor risk levels, you can’t just have a set and forget policy, you have to stay on top of your positions and your total portfolio risk. Having a risk management plan is crucial to success as a trader and something that should be done before you start trading. Everyone wants to make a great trade and make lots of money, but you should never take risk management too lightly. What risk management rules fo you have in your trading plan? They Can Control Emotions – Options trading is an incredibly emotional journey and one that you cannot fully appreciate until you have your own hard earned money on the line. The best traders are able to control their emotions not just when times are bad, but probably even more importantly when times are good. In my experience, and I’m sure this is the same for most traders starting out, some of my biggest losses have come when my confidence has been high. The best traders can keep their ego out of the equation and are able to stay grounded even in the midst of tremendous winning streaks. Also, when one of their trades turns out to be a loser, they are able to admit they were wrong and close out the trade. Great traders never get attached to a trade or a particular stock. A bad trade could turn out to be ok, but sticking to your pre-defined trading rules is crucial. You can be 100% right on a particular trade, but you also need to have the right timing. If your timing is off and your trade breaks your stop-loss you should always stick to your trading rules and keep your emotions out of it.Get Your Free Covered Call Calculator They Are Incredibly Disciplined – Successful option trading takes a great deal of discipline. Beginner option traders may find it incredibly difficult to just sit and wait for a good opportunity to trade. Waiting for the right opportunities may mean you don’t trade for a while, but trading out of boredom or excitement is one of the worst things you can do. Having a money management and a risk management plan is one thing, but in order to be a successful trader, you need to have the discipline to stick to it. You also need discipline to stick to the types of trades you are successful with and not start trading strategies that you are not an expert in. They Are Focused – For beginner options traders it is very easy to get carried away and get excited by all the green P&L numbers on their account statement. Keeping a level head is essential. Staying focused can also be hard when there is so much news on the markets and so many experts, each with a different opinion. The most important thing is to stay focused on your goals, your trading strategy and your rules. Don’t try to copy someone else’s trades or go against your trading rules just because of something Jim Cramer said. Get to know yourself as a trader as well, I have had a few periods when I wasn’t focused and that led to some big losses. I now can recognize those periods and I know those are the times when I really need to refocus my energies and review my trading plan. If you find yourself losing focus, or getting too distracted and stressed with everything going on, it can be a wise move to close out all of your positions and take break for a while. Sometimes that is the best medicine and will allow you to come back with a clear head, more relaxed and more focused. They Are Committed – Options trading takes a great deal of commitment. Any time you have your hard earned money at risk, you should be trying to get the most out of your investment strategies and controlling your risk. You need to be on top of your game all the time. Any time you stop paying attention to the market, you will get burned. Not only do you need to keep an eye on your trading performance, you need to be staying abreast of the current news, market cycles and investment outlook. Some of the great resources I use, that allow me to keep up to date on the markets and take up the least amount of my time include: Alpha Trends – Brain Shannon from Alphatrends.net is a market guru and author of one of the top 10 trading books ever written – “Technical Analysis using Multiple Timeframes”. Brian does a free video analysis of the markets a couple of times a week. In the first 5-10 minutes he goes through the current state of the general stock market and the various market indices. Watching this video only takes a few minutes each week, but you will receive expert analysis on the market from a trader with 17 years experience. Later in the video Brian goes through examples of specific stocks of interest which can be a great source of trading ideas. IBD – Investor’s Business Daily is the news service the market pros use. It only takes a minute each day to read their Big Picture article to see what cycle the market is in as well as how the some of the market leading stocks have been performing lately. IBD is listed as the 4th most visited site by Charles Kirk of The Kirk Report. If you’re a beginner options trader and find you’re struggling with the commitment required to keep up to date with the market, or find you are suffering from information overload, try these 3 sites out. You will be able to get opinions from multiple experts and it will take you less than 10 minutes a day! They Have Back Tested Their Strategy – Backtesting is a key part of developing your trading plan. This involves evaluating your trading strategy against the historical performance of the market to check the past performance. Of course past performance does not guarantee future performance, but it will at least give you an idea of how your strategy has performed in different time periods and market conditions. The average investor may not have the capabilities to run these calculations on their own but there are a number of software providers out there that will be able to perform backtesting. In addition, most brokers such as TD Ameritrade have backtesting software that is free to account holders. Backtesting allows you to evaluate the pros and cons of your strategy and also provides scope for improvement or tweaking of the strategy. However, a few things to consider are: Make sure you are using an appropriate time period – If you are testing a long only strategy between 1995 and 2000, you are likely to get some very favorable results. The same strategy may not have performed so well between 2007 and 2009. It’s a good idea to test a strategy over a long time period. Take into account sectors – If your trading strategy is solely focused on a particular sector, your backtest sample should be taken from that sector. However, in all other cases it is best to use a large sample size from all sectors. Take into account commissions – commissions can seriously erode your returns, so you need to adjust for this expense, especially if your strategy involves frequent trading. Past performance may not be a good guide to the future – While your chosen strategy may have worked in the past, there is no guarantee it will work in the future. A good idea is to paper trade for a month or two, just to make sure your strategy still works in the current environment. Some great resources for backtesting can be found at http://www.tradecision.com and http://www.amibroker.com. While I have not used these resources personally, they come highly recommended from other industry professionals. So, those are my Top 10 Traits For Successful Options Trading, what do you think? Can you think of any other important traits required for successful investing? Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. He likes to focus on short volatility strategies. Gavin has written 5 books on options trading, 3 of which were bestsellers. He launched Options Trading IQ in 2010 to teach people how to trade options and eliminate all the Bullsh*t that’s out there. You can follow Gavin on Twitter.

Well, every trade should be put in context. Before evaluating a trade (or an options strategy), the following questions should be asked and answered: What is the holding period of the strategy? What is the maximum risk? What is the profit potential? What is the average return? What is the winning ratio? Why holding period is important? Well, making 5% in one week is not the same as making 5% in six months. In the first case we are talking about 250% annualized return. In the second case, 10%. See the difference. Maximum risk is important because it doesn't make sense to aim for 5% gain if your strategy can lose 50-100%. For example, when you are trading a directional strategy, and the stock gaps against you, the losses can be catastrophic. Since the risk is high, you should aim for higher return to compensate for the risk. However, if your maximum risk is limited, you can aim for lower return and still get excellent overall performance. Lets examine our pre-earnings straddles as an example. As a reminder, a long straddle option strategy is vega positive, gamma positive and theta negative trade. It works based on the premise that both call and put options have unlimited profit potential but limited loss. Straddles are a good strategy to pursue if you believe that a stock's price will move significantly, but unsure as to which direction. Another case is if you believe that Implied Volatility of the options will increase - for example, before a significant event like earnings. I explained the latter strategy in my Seeking Alpha article Exploiting Earnings Associated Rising Volatility. IV usually increases sharply a few days before earnings, and the increase should compensate for the negative theta. If the stock moves before earnings, the position can be sold for a profit or rolled to new strikes. This is one of my favorite strategies that we use in our SteadyOptions model portfolio. This is how the P/L chart looks like: How We Trade Straddle Option Strategy provides a full explanation of the strategy. Lets take a look at 2022 statistics for this strategy: Number of trades: 148 Number of winners: 103 Number of losers: 40 Winning ratio: 72.5% Average return per trade: 4.9% Average return per winning trade: 8.7% Average return per losing trade: -10.2% Average holding period: 7.2 days Lets do a quick math. If you can do 10 trades per month, each trade producing 5% gain on average and 10% allocation per trade, your monthly return is 5% on the whole portfolio. That's 60% non compounded annual return, with minimal risk. To answer the original question: for a strategy that has 70%+ winning ratio and loses on average 10% on losing trades, with average holding period of one week, 5% is an EXCELLENT return. In fact, I would consider it as Close to the Holy Grail as You Can Get. Related Articles: How We Trade Straddle Option Strategy Buying Premium Prior to Earnings Can We Profit From Volatility Expansion into Earnings Long Straddle: A Guaranteed Win? Why We Sell Our Straddles Before Earnings

Unfortunately, when it comes to options, all too many traders are led astray on the role probabilities play in option trading and end up limiting their chances of success. This article has two objectives: Discuss Probabilities and Option Trading Offer suggestions on making winning option trades Probabilities and Outcomes Most people believe that when placing a bet with multiple choices it is wisest to take the one with the highest probability. We see this frequently when option traders espouse selling Deep-Out-of-The-Money (DOTM) calls or puts and other strategies as “High-Probability” trades. This is facilitated as most every Broker-Dealer includes “probability” as part of their option trading platforms. One requires no special math skills to determine which of many options trades offer the highest probability. Option probabilities can be just a mouse-click away. But the real question is “Does knowing the option probability help us?” Expected Return When placing bets, or investing, it is NOT the probability of outcome that dictates choice … it is the probability of outcome weighed against the “pay-off” that matters. One cannot make a successful and informed choice until one is given the “pay-off”. It is NOT probability that matters ... it is EXPECTED RETURN that matters. If you take nothing else from this article, take this… When placing a bet, one does not choose the most “probable” outcome; one must choose the most “favorable” outcome. Let’s look at the simple coin toss to better understand this. We all know that a fair coin toss has a 50% probability of landing either heads or tails. But what if the odds for winning bets on heads were one-for-one (1:1) while the odds for winning bets on tails was only 0.75:1? Though the probability remains the same, the expected return does not. One can expect to break even betting on heads and lose money betting on tails. One must not just look at the probability of “winning” but compare it to the reward to determine if it is favorable. So, what do coin tosses have to do with option trading? Very simple … option pricing is 100% about probabilities. The real difference between options and a coin toss is that expected return is not as easy to calculate. There are numerous possible results. For instance selling a DOTM Call has a fixed return on the profit side, but many possible results on the loss side…including (theoretically) unlimited loss. In order to calculate the expected return one cannot just multiply the probability by the premium credit. One must also calculate the expected loss return for each strike interval that ends up in-the-money (ITM). It means taking every possible strike for the underlying, calculating the probability associated with that strike, multiplying each strike by its probability, adding them all together and subtracting them from the probability of gain. This is an arduous task (fortunately made easier through calculus). The Greeks Consider that the Market makers determine the pricing using very sophisticated statistics and “Greeks”. Most traders are aware of some of the first order Greeks such as Delta, Theta and Gamma … but there are second and third order Greeks most traders never heard of… such as “Charm” and “Speed”. So don’t fool yourself, without advanced training in math, statistics, probabilities and the proper algorithm you cannot properly assess all the factors taken into account in the pricing. I’ll save everyone a great deal of effort in making these complex calculations and simply state that every option is probabilistically equivalent. Over time, one has NO better probability of a GROSS profit on a DOTM option than a DITM option. This may take a little explaining. Surely, a call that is written 2% DOTM has a much better chance of not being over-run than a call 1% OTM. However, it also has a much lower premium credit. Over time, the extra “over-run” risk of the 1% OTM is compensated for by the extra premium credit gained when it is not over-run. They are probabilistically equivalent. If I may “hammer this home” by using a Roulette wheel as an example. Bettors can make the equivalent of a DOTM bet by betting on odd, even, red or black. Or they could make the equivalent of an ATM bet by betting on a single number, such as 28. Over time the monetary results will be the same. They will “hit” more often on the red/black/odd/even but will win less when they do. I won’t go into it here, but the “house edge” is the same 5.26% on every bet one can make (actually, there is one bet that increases the “house edge” to 8%, but few make that bet). Let me also clear up a common misconception about probability and the Roulette wheel. Probability theory DOES NOT predict that everyone will be a loser if they play often enough. Quite the opposite. Even in a game that is purely chance and requires no skill, there will be lifetime winners and lifetime losers. It’s only when these two sets of betters are aggregated will we see the expected result. Probability theory only predicts that, over time, the winners and losers will even out and winners will win 5.26% less than “fair” and losers will lose 5.26% more than “fair”. If you are not a member yet, you can join our forum discussions for answers to all your options questions. The House Edge With this basic understanding of options probability and expected return, let’s look to see if the “high-probability” option trade is, in fact, the “most favorable” trade. To make this analysis we must add in the costs of the trade. We need to move out of theory and into reality … a reality where the Market Maker insists on a “house edge”. Before I get started, let me say that there are, on occasion, mispriced options. If there is a mispricing it can be exploited. However, this is very rare and most traders aren’t equipped to notice it. So let’s leave that on the shelf and move forward. Let me use options on SPDR S&P500 ETF (SPY) as my example. I choose this underlying as they are widely traded, liquid and have a very low bid-ask spread. Let’s look at selling a call option. We can compare an At-The-Money (ATM) trade with a DOTM trade. We must remember that the pay-offs are adjusted according to their probability. From a risk/reward perspective on a GROSS return they are equivalent. Let’s look at the bid/ask of the ATM and the OTM option. Though the bid/ask will vary dependent upon duration (weekly, monthly, etc.) …. for these purposes let’s look a month ahead. Most typically, the option will be priced as follows: Strike Bid Ask Spread “House Edge” 214 (ATM) 4.04 4.05 .01 .25% 218 (2%OTM) 1.78 1.79 .01 .56% 222 (4%DOTM) .46 .47 .01 2.12% What we discover is that the bid-ask spread (the “house edge”) when represented as a percent of the premium, actually increases the further OTM one goes. Though the options probability/payoff is theoretically identical, the “house edge” is not. So, the further OTM one goes, the less “favorable” the option becomes. If one added the fixed trading costs … which vary by broker ($6.95,$7.95,$8.95, etc.) … it would further compound the disadvantage of OTM options. As a function of the “house edge” increasing the further OTM one goes, a nearly “fair” ATM option becomes an unfavorable DOTM option. The results can be even more dramatic with many other underlying stocks that don’t have as low a bid-ask spread as SPY. For instance, many stocks have a bid-ask spread of 5cents or 10cents (sometimes even more). That means the “house edge” can be from 6% to 15%. That’s a pretty steep hurdle to jump for profitable trading. Option Spreads Often traders will enter spreads as opposed to singular trades. The theory is to limit downside by reducing costs or exposure. One must consider that every option incurs its own “house edge”. So the more legs one enters, the less likely they will have a favorable outcome. This is a hard concept for option traders to get their hands around. So let me go back to the “probability laboratory” … the Roulette wheel. Each bet theoretically loses 5.26%. So, if one bets on, say, two numbers instead of one number, they increase their chances of a “hit” but they decrease their overall chances of winning money. Inasmuch as option pricing is neutral (except for the “house edge”) over time, one gains nothing by engaging in multiple legged option strategies. Winning Option Strategies Now, let me be perfectly clear. I’m not suggesting that one cannot make profitable option trades. Nor am I suggesting that limiting costs or risk through spreads and other actions is wrong. What I’m saying is that trying to make profit by looking at option trades that are, high probability is not a winning strategy. It is not “probability” that is important it is “expected return” that is important. What we’ve discussed so far is that option trades are “odds against”. That is, they may be high or low probability but the only favorable trade lies with the market maker. Does that mean I can’t win trading options? Of course not … many people do very well and since you’re on this site, you’re probably one of them. The one thing that separates option trading from the roulette wheel is that the Roulette wheel is a game of CHANCE and option trading can be a game of SKILL. But let me be as clear as I can. The skill is NOT evidenced in “fancy-dancy” option strategies. The skill is evidenced in correctly predicting the movement of the underlying security. This bears repeating ... so here goes …. The skill is NOT evidenced in “fancy-dancy” option strategies. The skill is evidenced in correctly predicting the movement of the underlying security. Successful option traders are successful because they spend most of their time understanding the stock or the market. Let me give an example: If I said that that SPY would end up at $218 on December 31st and asked for an option strategy to match that result … option traders could easily maximize a variety of strategies. Instead, if I said that SPY would end up between $200 and $218, completely different strategies would unfold. If SPY actually landed at $218, none of these would show the gains of the first hypothesis. In contrast, if SPY ended at $200 they would all show better results than the first hypothesis. Therefore, the viability of any strategy is dependent upon its relevance to the underlying. If one gets the underlying right, they will prosper. If they don’t, they won’t. Summary Successful long term option trading starts with an understanding that there is no such thing as a free lunch. Option trades involve counter-parties and there are winners and losers on every trade. That is, except for the Market Makers taking their “house edge”. It is important to understand that options are not some sort of Magic Elixir. They are not a substitute for stock market research. What they can provide is a very calculated methodology to exploit stock market movement. It doesn’t really matter if a stock is up, down or flat … there’s an option play to exploit every possible scenario. When option traders focus more on the characteristics of the underlying and less on the characteristics of a particular option strategy, they will find it much easier to pick the winning option strategy. Related articles: Is Your Risk Worth The Reward? 10 Options Trading Myths Debunked Can you double your account every six months? Debunking Options Guru Advice Why Winning Ratio Means Nothing Do 80% Of Options Expire Worthless? Want to see how we handle risk? Start your free trial

A popular option strategy is the short strangle, which consists of selling an out of the money put and call. My personal backtesting and real trading experience is that this strategy on equity market ETF's or cash settled indices can increase portfolio diversification and if overlaid on a portfolio of underlying assets like mutual funds or ETF's can also increase total returns. When you sell a strangle, you bring cash into your account. By doing so, you can "overlay" this trade on top of a portfolio consisting of ETF's or other investments without paying margin interest. Before we get too deep into the weeds, lets deal with the elephant in the room...you've heard strangles are risky. Is that true? The answer isn't that simple, as the trade isn't what measures risk, instead, it's the position size. Excessive leverage is risky, but strangles don't have to be traded this way. I'd encourage every option trader to not only consider the margin requirement of any particular option trade, but the notional risk. For example, think in terms of a 1 contract SPY strangle with SPY trading at $280 as theoretically being a $28,000 position (stock price X 100), similar to how buying 100 shares of SPY at $280 is a $28,000 position. When sized this way, a typical strangle will actual have less risk than the underlying asset. With this in mind, let's look at a rough example of how we could implement this idea in a $100,000 account. First, we'll look at the performance of a 50/50 stock/bond portfolio that is rebalanced monthly since 2000. This portfolio would have returned a little over 5% annually, with a standard deviation of 7.31%, producing a Sharpe Ratio of 0.54. Next, we'll add a 50% strangle allocation to this same portfolio. Yes, this equals 150%, which does make this concept only possible in a taxable margin account. The strangle allocation is based on our own backtesting platforms and proprietary rule sets and includes hypothetical trades on both SPY and IWM. A trader would sell 2 strangles on SPY in a $100,000 account to approximately replicate the concept. Blue: Stock/Bond Portfolio Red: Stock/Bond/Strangle Portfolio The 50/50/50 portfolio nearly doubles the annualized return to over 10%, and only with a modest increase in standard deviation to 8.37%. This increase in risk adjusted return substantially improves the portfolio Sharpe Ratio to 1.05. Even with a 50% increase in total portfolio allocation, the portfolio risk only slightly increases due to the low correlation of the strangle strategy to both stocks and bonds. This example is only meant to show the concept of an option overlay in action, and the potential benefits of doing so. Many other creative ideas could be implemented with other underlying assets and option strategies. My investment advisory firm, Lorintine Capital, currently implements these concepts in managed accounts as well as in one of our private funds, LC Diversified Fund. We are happy to have discussions with investors interested in a professionally managed solution, or ideas on how to implement this concept on their own. Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse is managing the LC Diversified portfolio and forum, the LC Diversified Fund, as well as contributes to the Steady Condors newsletter.

I came across an excellent article by Colibri Trader. Here are some gems from the article. The question of what it takes to become a master in any field (sport or business) has been in the epicentre of research for many years. It has occupied psychologists and philosophers alike for decades. Is it the innate talent what matters or a skill can be mastered with practice. What does it take for professional athletes to become first among others with inborn talents… Almost fifty years ago Herbert Simon and William Chase summed up a groundbreaking conclusion that is still echoing with importance: After Simon and Chase there have been numerous psychologists and authors testing this hypothesis and proving and disproving the rule of “The 10, 000 Hours“. For example, John Hayes researched the works of over 70 of the most famous classical composers and found that almost none of them did create a masterpiece before they have been composing for a minimum of 10, 000 hours. There were just a few exceptions and they were Shostakovich and Paganini, who took them only 9, 000 hours. In trading, it seems to be the same or at least really similar. I don’t know a lot of other traders, whom after an honest conversation have not shared with me that have spent years of losing money consistently before becoming profitable. In my trading career I remember just one trader who told me that was successful straight from the very beginning. He was sharing with me that it only took him 3 months on a simulator and with the help of his trading mentor, he became successful. He is an exception because in his case- he managed to save a lot of costly mistakes by following his mentor’s trading approach. But most traders are doing it alone and that is why it takes them such a long time. Trading, as any other highly competitive sport discipline, takes a lot of hours in front of the screens and practice. In a book that I recently read (Focus: The Hidden Driver of Excellence), Daniel Goleman reveals the complex truth behind the popular 10,000 rule: The words of Ericsson cannot be more true regarding the trading field. Professional traders know that going out of the comfort zone is what makes a difference in the long-run. Imagine you are doing the same trading mistake over and over again. The only way to get rid of your bad habits is to get out of your “comfort zone” and do something differently. Even if you are not sure where your mistake is, you should put all of your efforts into trying to find it. Only then and after long hours of practice, you would be able to become profitable. What matters in this case is not only the time invested in trading, but the quality of the time. It appears that even if you stay 20,000 hours in front of your screens, it won’t make a difference if you are doing the same mistakes repeatedly. It seems obvious and simple, but modern education is build on the premise of sheer time investment. That is why it is important to emphasize on the fact that success is “deliberate practice”, concentrated training with the sole aim of personal improvement, many times accompanied or guided by a professional and skilled coach or mentor.That is how I became successful myself- I have been mentored by one of the biggest and most successful traders in London. Before I had the chance to meet this important person to me, I was making too many mistakes- 80% of which I was not even aware of! That is such a striking number when I look back at it now. According to Goleman, what I have found also applies to other disciplines: That is completely in-line with trading field. You need an objective feedback from somebody, who can monitor your performance. Human beings tend to be subjective when it comes to measuring their own performance. That is why, it is crucial that you have a profitable trader helping you along the 10, 000-hours of trading journey. It is imperative that you are coached by a real professional or at least somebody with years of trading behind his back. No wonder that every world-class sports champion has a coach. If you keep on trading without a feedback from a proven profitable trader, you won’t be able to get to the very top. In the end, it seems that the trading strategy that you are using is not the most important element of becoming a master trader. It is the feedback that you receive from really experienced traders and the quality of the time invested in improving you own mistakes. Now stop thinking how good you are- start seeing how you can improve through concentrated trading effort. Some quick tips and facts My good friend Kirk Du Plessis from OptionAlpha lists few things to consider as you write down your expectations and goals. More traders lose more money than they make. The figures are a little off depending on who you talk to, but it is 80% to 90% (maybe more) who end up losers and leave the business altogether. Only a small percentage of retail traders are profitable. The numbers get even smaller if you look at a 3-5 year average which measures consistency. Don’t get discouraged, we all fell off the bike before we learned to ride it right? Paper trade first with a small amount of money. I always recommend members to paper trade everything first. This applies not only to new traders. Even if you have some experience with options, it always takes some time to get used to new strategies. This way you learn how to enter orders, adjust trades, and more importantly learn you’re your mistakes without losing real money. Then when you are ready to invest real money, keep it small. Prove yourself that you can make money with 10k, then increase it to 20k and so on, but do it gradually. You will have losing trades. Too many people quitting after a streak of 4-5 losing trades. Losing money is part of the game, the trick is to keep the losses as small as possible. Don’t expect to become financially independent. Don’t you think it’s completely unrealistic to expect a small account, say under $5,000, to generate consistent income to replace your regular job? I aim for many singles instead of few home runs. Those are all great quotes. I suggest remembering them when you get frustrated and overwhelmed by the amount of information and learning curve required to become a successful trader. Related Articles: Why Retail Investors Lose Money In The Stock Market Can you double your account every six months? How to Calculate ROI in Options Trading Performance Reporting: The Myths and The Reality Are You EMOTIONALLY Ready To Lose?

As always, note these are my opinions only, I am not able to predict the future, and you should form your own opinions before making any investment decisions. If anyone has any questions, I welcome your posts, emails, and even calls. Market Thoughts To me, there is only one investment rule currently in play -- do not bet against the Federal Reserve. Whether you want to call it a Bernanke put or the Yellen floor, the markets are being controlled by the Fed right now. In the last eighteen months, I personally have had this made very clear to me. While of course fundamentals of a business still matter, market trends as a whole are governed by the Fed and will continue to until the Fed stops. Interest rates, bond markets, gold prices, oil prices – are all tied to current Fed policy. In a way that is unfortunate, as it makes it impossible for efficient markets. However, it certainly is a great wave to be on while it lasts. So just how long is it going to last? Well according to Yellen, at least for a few more months (and thus the most recent run up in the market this week). Until the Fed starts hinting at taking their foot off the gas pedal, I do not think we’ll see a major market draw down. Now Fed policy cannot guarantee that markets will keep going up at a rate of twenty percent per year, but it should provide a floor and prevent a major sharp drawdown. But does the Fed keep its current policies in place through Summer 2014? Your guess is as good as mine. Not knowing when the rug is going to be yanked out from investors should keep everyone on their toes. If you’re not in a place to make significant adjustments once governmental policy changes, you certainly need to have some sort of protections in place – whether it is stops, puts, or owning inverse positions (such as a long/short fund). This past summer gave us a hint of how fast prices can move when the Fed even hints at changing prices. Bond prices cratered, very quickly, just on the hint of changing rates. Once it becomes official policy to increase rates and slow down bond purchases, it very well could be too late to save your bond portfolio. (Of course this also depends on what your bond portfolio is and the purpose of it – if you own physical bonds for yield and not growth, you likely will not be affected near to the extent as the individual who owns three major bond funds.) I realize that a prediction that (i) the market will stay somewhere between up and flat and (ii) until the Fed moves then bad things may happen is not much of a prediction and may seem obvious. However, that is the problem with large governmental intervention – it interferes with normal market movements and patterns. Because of this, I structure my personal investments always with one eye toward fast changes and try to invest as much as I can in actual non-correlated assets. If your investment adviser has you in a small-cap fund, a mid-cap fund, a large-cap fund, a foreign investment fund, a commodity fund, a bond fund, and a high dividend fund such as a REIT or pipeline, and tells you that you’re adequately diversified find a new investment adviser. In a market crash, ALL of those asset classes will get hammered. Sure, on a week to week basis in a bull market you are diversified and relatively protected against company and sector risk. But you are horribly exposed to market risk, and the vast majorities of investment advisers either simply do not understand this or believe that “that’s just the way things are.” However no investor should accept that answer. Yes, all of those investments have a place in a portfolio, but that should not be the end of the investment discussion. Rather the next questions have to be “how to I protect those investments,” as well as “if these investments do not perform, how do I get income/growth.” It is entirely possible to have it all in a well-designed portfolio. Anchor Strategy Update There is an entire thread, open to all members, where I provide a full review, analysis, and critique of the Anchor Strategy as a whole and as it applies to Steady Option's members, If you have questions on the strategies performance, please direct them there. In a short synopsis though, the strategy is performing as expected. It's not under performing and it's not over performing. As for new developments, we are in the process of developing a "leveraged" Anchor strategy. With interest rates (particularly the margin interest rates available through Interactive Brokers) where they currently are, the potential for massive returns appear to exist. Note that this strategy is in its initial testing phases. It has been back tested and is currently being paper traded. I try not to recommend, or put my own money at risk, until I have (i) back tested the strategy, (ii) paper traded it for close to a year, (iii) submitted it for a full Monte Carlo simulation, and (iv) traded it live with few funds committed. In the present case, I will have to avoid step (iv), as the strategy requires portfolio margin. I want to introduce the strategy here (as well as in the Anchor Trade forums) for members to comment on. The basic premise behind the Anchor Strategy, for those that don't know, is to fully hedge a "normal" stock/ETF portfolio, that is highly correlated to the S&P 500 through the purchase of LEAP puts. In essence, an investor is buying insurance in the form of puts that if the market goes down then the investor’s portfolio would not. However, such "insurance" typically cost (depending on volatility) anywhere from 7%-15% of entire portfolio. This is simply too expensive. If the markets average a 7% return over a decade, you'd only break even on such a strategy. If the markets average a 5% return over a decade, the investor would be down well over 20% while anyone just holding the SPY ETF would be up well over 60% (compounding). That's simply not acceptable -- so a way to "pay" for the hedge has to be found. The Anchor Strategy does this by purchasing "extra" LEAP puts and then selling short against them weekly. A full discussion of how this works is available in the Anchor forums. As noted the goal of the Anchor strategy is to not lose money, while not sacrificing too much upside in bull markets. However, investors are always on the quest for outsized returns. The question this is if this can be accomplished with the Anchor Strategy. It appears as if in the current interest rate environments it can. Again note, this is not a fully developed strategy, and I would not advise anyone to utilize it or trade it right now without further work and a very in depth understanding of the risks of trading options on highly leveraged portfolio margin. Here's the basic premise: Interactive brokers, on portfolio margin accounts, currently charges 1.09% margin interest; A weighted combination of the SDY, RSP, and VIG etfs (which HIGHLY correlate to the S&P 500), pays a dividend of 1.79%; On portfolio margin, these ETFs can be traded at ratios of 10:1 or 15:1; Going on "full" margin (a 10:1 or 15:1) is too risky, as it leaves no "wiggle room," so let's target a use a 6:1 ratio; Assume an account of $1m, with which we buy $6m of ETFs (using $5m in margin); We then apply the Anchor Strategy to the entire $6m we just bought. To hedge at current levels and costs would cost about $750,000.00 (so now at 5.75:1); Then just use the Anchor strategy week to week to "pay" for the full hedge; Margin interest on the year is 1.09%, on $5,750,000 that's $62,675.00 (that's not entirely accurate as it will be less than that as the year goes on as the hedge will be "paid for," so the number will be dynamic, but let's keep the calculations simple for now); Dividend payouts on the $6m will be $107,400 -- or at least $44,725 more than margin interest. What then are the possible outcomes, assuming the Anchor Strategy works as designed as a hedging vehicle? In a flat market (S&P 500 return of 0%, but dividends of 1.89%), the leveraged strategy would return more than 4.47% -- so it would out perform the S&P 500; In a slightly up market (5% or so), the S&P 500 would return 5.89% (inclusive of dividends) and the leveraged strategy would return 34% (inclusive of dividends); In major up markets (S&P 500 up 20%), the S&P would return 21,89% (inclusive of dividends) and the leveraged strategy would return 94% (this assumes a "lag" of about 5% due to the lag in the Anchor Strategy, so each $1m would only be up 15%); In slightly down markets (-5% or so), the S&P 500 would be down 3.11% and the leveraged Anchor Strategy would be up 4.47%; In large bear markets (-20%), the S&P 500 will be down at least 20% (who knows what dividends will be slashed), and the Anchor Strategy will be up 20% or more (due to increased value in the long puts because of volatility). Back testing validates the strategy. Paper trading started in July 1. Over that time the S&P 500 is up 10.01% and the leveraged strategy is up 13.5% (only one quarter of dividend payments). This includes "rolling" the hedge from 166 to 176 a week or so ago. In other words, in the absolute worst market for the strategy (S&P up over 10% in the immediate months after starting), the strategy is out performing the S&P 500 and working exactly as designed. The biggest risks I see to this is (i) interest risks, if interest rates go above 3.5%-4% I'm not sure it still makes sense as flat markets could really hurt, (ii) margin calls -- in wild markets, option pricing on bid/ask spreads sometimes gets out of proportion, and margin calls are based on the side of the bid/ask you don't want to be on. Once the strategy is fully tested I will update more, but I wanted to introduce it to members for thoughts, questions, and comments. Professional Update/Lorintine Capital As many of you know I have an investment advisory firm, Lorintine Capital. For quite some time the primary focus of the Firm was to serve as a manager to a few hedge funds. However, due to numerous client requests, this year the Firm elected to become a “traditional” investment advisory firm offering a full range of services. Lorintine Capital is now also provides traditional investment management services to its clients, including providing investment advice, portfolio management services, retirement account services, and generally serving as financial advisers. personally am adverse to long term buy and hold, “riding” the market waves, and cannot stand advisers who just stick investors in their firm’s “plan” and take their 1.5%-2% in fees per year for basically doing what Morgan Stanley (Dain Rauchser, Edward Jones, Merrill Lynch – take your pick) publishes. This is not a good value for the client-investor. Too many investors are unprepared for market crashes, miss out on potential income, and have investment advisers who are reactionary instead of proactive. Lorintine Capital tries to avoid that, while at the same time actually educating investors about their options and assisting them in meeting their long term goals. In furtherance of this change, the Firm recently added a new investment adviser, Jesse Blom, who runs the Firm’s South Dakota office while I still run the Dallas, Texas office. We are currently in negotiations to bring another advisor on board in January, will have a new website by the end of the year, and are actively adding clients of all kinds. initial feedback to this change has been overwhelmingly positive. Given the Firm’s advisers’ backgrounds and the fact that it is a completely independent Firm, we have the capability of bringing hedge fund models, conservative strategies, and any products to the table that fit our clients’ needs. We now operate managed accounts specifically garnered toward the strategies discussed through Steady Option (Anchor and Steady Condors), retirement accounts, and typical investment portfolios. If you would like to discuss any of the products or services Lorintine Capital provides, contact me or Jesse at your convenience.

They consider the 'options game' to be simple: You buy a mini-lottery ticket. Then you win or you don't. I have to admit – that's pretty simple. It's also a quick path to losing your entire investment account. It's important to have a fundamental understanding of how options work before venturing onto the field of play. But not everyone cares. It you are someone who prefers to keep his/her money, and perhaps earn more, then those option basics are a must for you. No one takes a car onto the highway the very first time they get behind the wheel, but there is something about options, and investing in general, that makes people believe it's a simple game. They become eager to play despite lack of training. Today's post provides 6 options expiration tips. Options have a limited lifetime and the expiration date is always known when options are bought and sold. For our purposes assume that options expire shortly after the close of trading on the 3rd Friday of every month. (Expiration is the following morning, but that's just a technicality as far as we are concerned) Please don't get caught in any of these traps when trading options on expiration day. 1) Avoid a margin call New traders, especially those with small accounts, like the idea of buying options. The problem is that they often don't understand the rules of the game, and 'forget' to sell those options prior to expiration. If a trader owns 5 Apr 40 calls, makes no effort to sell them, and decides to allow the options to expire worthless, that's fine. No problem. However, if the investor is not paying attention and the stock closes at $40.02 on expiration Friday, that trader is going to own 500 shares of stock. The options are automatically exercised (unless you specifically tell your broker not to exercise) whenever the option is in the money by one penny or more, when the market closes on that Friday. In my opinion, this automatic exercise 'rule' is just another method that brokers use to trap their customers into paying unnecessary commissions and fees. On Monday morning, along with those shares comes the margin call. Those small account holders did not know they were going to be buying stock, don't have enough cash to pay for the stock – even with 50% margin – and are forced to sell the stock. Rack up more costs for the investor and more profits for the broker. Please don't forget to sell (at least enter an order to sell) any options you own. 2) Don't exercise If you own any options, don't even consider exercising. You may not have the margin call problem described above, but did you buy options to make a profit if the stock moved higher? Or did you buy call options so that you could own stock at a later date? Unless you are adopting a stock and option strategy (such as writing covered calls), when you buy options, it's generally most efficient to avoid stock ownership. Here's why. If you really want to own stock, when buying options you must plan in advance, or you will be throwing money into the trash. For most individual investors – at least inexperienced investors – buying options is not the best way to attain ownership of the shares. If the stock prices moves higher by enough to offset the premium you paid to own the option, you have a profit. But, regardless of whether your investment has paid off, it seldom pays for anyone to buy options with the intention of owning shares at a later date. Sure there are exceptions, but in general: Don't exercise options. Sell those options when you no longer want to own them. Example: Here's the fallacy. The stock is 38, you buy 10 calls struck at 40, paying $0.50 apiece. Sure enough you are right. The stock rallies to 42 by the time expiration arrives. You know a bargain when you see one, and exercise the calls, in effect paying $40.50 per share when the stock is worth $42. This appears to be a good trade. You earned $150 per option, or $1,500. Before you congratulate yourself on making such a good trade, consider this: The truth is that you should have bought stock, paying $38. If you are of the mindset that owning shares is what you want to do, then buying options is not for you. And that's even more true when buying OTM options. If you are an option trader, then trade options. When expiration arrives (or sooner) sell those calls and take your profit (or loss). There's nothing to be gained by exercising call options to buy stock. Why pay cash for an option, then hope the stock rises so that you can pay a higher price for stock? Just buy stock now. If you lack the cash, but will have it later, that's the single exception to this rule. If this exception applies to you and you are investor, not a trader, then buying the Apr 40 calls is still the wrong approach. Buy in the money calls – perhaps the Apr 35s. You might pay $3.60 for those calls. If you do eventually take possession of the shares, the cost becomes $38.60 (the $35 strike price plus the $3.60 premium) and not $40.50. Buying OTM options is not for the investor. 3) Do not fear an assignment notice If you are assigned an exercise notice on an option you sold, that is nothing to fear, assuming you are prepared. By that I mean, as long as the assignment does not result in a margin call. Many novices are truly fear receiving an assignment notice. It's as if they believe 'something bad has happened. I don't know what it is, nor do I know why it's bad.' Being assigned prior to expiration is usually beneficial from a risk-reduction perspective. More on this topic at another time. If you are not a member yet, you can join our forum discussions for answers to all your options questions. 4) European options are different Most options are American style options and all the rules you already know apply to them. However, some options are European style (no, they do not trade only in Europe), and it's very important to know the differences, if you trade these options. Most index options are European style: SPX, NDX, RUT (not OEX). These are index options and not ETF (exchange traded fund options). Thus, SPY, QQQQ, IWM are all American style options. a) These options cease trading when the Market closes Thursday, one day prior to 'regular' options expiration day (except for weeklies). b) The final 'settlement' price – the price that determines which options are in the money, and by how much – is calculated early in the trading day on Friday, but it's not made available until approximately halfway through the trading day. The settlement price is NOT a real world price. Thus, when you observe an index price early Friday morning, do not believe that the settlement price will be anywhere near that price. It may be near, and it may be very different. It is calculated as if each stock in the index were trading at its opening price – all at the same time. Be careful. Often this price is significantly higher or lower than traders suspect it will be – and that results in cries of anguish from anyone still holding positions. It's safest to exit positions in Europeans options no later than Thursday afternoon. c) European options settle in cash. That means no shares exchange hands. If you are short an option whose settlement price is in the money, the cash value of that option is removed from your account. If you own such options, the cash value is transferred to your account. 5) Don't hold a position to the bitter end It's not easy to let go. You paid a decent premium for those options and now they are down to half that price. That's not the point. You bought those options for a reason. The only question to answer is this: Does that reason still apply? Do you still anticipate the stock move you had hoped would happen? Has the news been announced? If there is no good reason to hold, cut your losses and sell out those options before that fade to zero. Is the shoe on the other foot? Did you sell that option, or spread, at a good price and then see the premium erode and your account balance rise? Is that short position priced near zero? What are you waiting for? Is there enough remaining reward to hold onto the position, and with it, the risk? Let some other hero have those last couple of nickels. Don't take big risk unless there's a big reward. Holding out for expiration – especially when it's weeks away is not a good plan. 6) Negative gamma is not your friend When you are short options, you are short gamma. Most of the time that's not a problem. You get paid a nice rate of time decay to hold onto a short position – reducing risk when necessary. But show some respect. Negative gamma is the big, bad enemy. When the reward is small, respect this guy and get outta town. Cover those negative gamma shorts, take you good-sized profit and don't bother with the crumbs. Options expire monthly. It's important to understand the risks and rewards associated with trading options on expiration day. Related articles: How Index Options Settlement Works Can Options Assignment Cause Margin Call? The Right To Exercise An Option? Why You Should Not Ignore Negative Gamma Want to see how we handle expiration risk? Join Us

I was taught that one of the assumptions used in this strategy is that for the most part, the market has all ready priced the option correctly for the upcoming news so by allowing for some price movement within your strangle, this is more of a volatility play than a price play. Mark's response: 1) To me they are the same, with the straddle being a subset of the strangle In other words, a straddle is merely a strangle when the strikes and expiration dates are the same. I prefer the strangle because it allows the trader to choose call and put strike prices independently, rather than being 'forced' to choose the same strike. I prefer to sell OTM calls and puts – and that's not possible with a straddle. As far as unlimited risk is concerned, that's a decision for each trader. I prefer the smaller reward and increased safety of selling credit spreads (an iron condor position), but that is not relevant to today's post. 2) A clarification. In is not 'volatility' that incurs a large decrease after the news is released. Instead it is the implied volatility of the options. I'm fairly certain that is what you meant to say. 3) Your earnings plays are far riskier than you currently believe them to be. These are not horrible trades, but neither are they as simple as you make them out to be. 4) I must disagree with whomever it was who told you that "the market has priced the option correctly for the upcoming news." The market has made an estimate of how much the stock price is likely to move. Note that this move may be either higher or lower ad that this difference is ignored when the size of the move is estimated. There is no formal prediction of move size. There is nothing that says the stock will move 6.35 points. What happens is the implied volatility rises as longs as more and more buyers send orders to purchase options. And it makes no difference if they are calls or puts. At some point option prices stabilize (or the market closes for the day) and a 'final' implied volatility can be measured. From the IV, the 'anticipated move' for the underlying is determined. AsI said, it's not as is everyone agreed on how much the stock will move. I hope you understand that when the news is released, there is very little chance that the predicted move is the correct move. Many times the move is far less than expected. That's the reason why selling options prior to earnings can be very profitable. The IV collapses because another substantial price change is NOT expected and there is no reason to pay a high IV to buy either calls or puts. However, if you chose to sell an option that was not very far out of the money (OTM), and if the stock moves far enough, then the IV crush. doesn't do a whole lot of good. Sure you gain as IV plunges, but you can easily incur a substantial loss when the short option has moved significantly into the money. Also remember that part of the time that stock price gaps by far more than expected. In that scenario, a higher quantity of formerly OTM options are now ITM. Thus, large losses are not only possible, but they are more frequent that you realize. Apparently your trades have worked out well (so far). Think about this: If those option buyers did not profit often enough to encourage them to pay 'high' prices for the options they buy, they would have stopped buying them long ago. The truth is that these option buyers collect often enough to keep them coming back for more. 5) That means you must be selective in which options you sell into earnings news. This is especially true when you elect to sell naked options. You cannot options on every stock, hoping that any random play will work. This is a high risk/high reward game. It's okay to participate, but please be aware of what you are doing and the risk involved.

Absolute momentum is often referred to as trend following or time-series momentum. We highly recommend those who want to go further in depth in to momentum trading strategies to pick up Gary Antonacci’s book, DualMomentum Investing: An Innovative Strategy for Higher Returns with Lower Risk. We will start by creating a benchmark global equity portfolio that is equally allocated to US large cap stocks and International stocks. The benchmark portfolio is rebalanced annually. Our analysis period is 1971–06/2019 which includes three substantial bear markets (1973-1974, 2000-2002, and 2008-2009), along with one of the most prolific bull market runs in recent history from 1982–1999. Historical data represents index data. You cannot invest directly in an index. Indexes do not include fees, expenses, or transaction costs. All examples are hypothetical. Past performance does not guarantee future results. Since 1971 our benchmark portfolio has produced double digit annual returns with a Compound Annual Growth Rate (CAGR) of 10.56%, enough to grow $10,000 to $1,299,946. Global equity markets have provided a substantial risk premium to investors who have been able to stay the course. But staying the course is the issue for most investors as even a globally diversified equity portfolio has experienced drawdowns approaching or exceeding 50% on multiple occasions. Drawdown measures the maximum amount of money lost from equity peak to valley. Taking our data back further, during the Great Depression US stocks experienced a drawdown exceeding 80%. Very few investors have the stomach lining to accept these kinds of drawdowns without abandoning a buy and hold investment plan. Painful losses in 2008 are still present in the minds of many evidenced by several studies showing how few investors have actually participated in the US stock market rally since 2009. The conventional wisdom for dampening equity market risk is adding a permanent allocation of bonds to a portfolio. 60% stocks and 40% bonds is still the benchmark portfolio today. Unfortunately, permanently allocating a portion of a portfolio to low risk bonds lowers expected returns, particularly in today’s historically low interest rate environment. This makes sense since conventional wisdom tells us that less risk equals less expected reward. An alternative to buy and hold first discovered in the 1930's is what many in finance call momentum. Momentum refers to the tendency for assets that have recently outperformed to continue outperforming in the near future. For example, if US stocks have outperformed International stocks over the past year this is likely to continue in the near future. In 1937 Cowles and Jones shared their findings that “taking one year as the unit of measurement for the period 1920 to 1935, the tendency is very pronounced for stocks which have exceeded the median in one year to exceed it also in the year following.” Hundreds of academic papers have confirmed the existence of momentum for decades, even centuries, across asset classes and around the world. Momentum is persistent and pervasive yet largely misunderstood and unused by investors of all size. Instead of equally allocating to a permanent allocation of US large cap stocks and International stocks, our first example of momentum investing will invest in whichever of the two had the highest return over the prior twelve months. The position will be held for one month, and then reassessed. Researchers often refer to this method as relative strength momentum. The findings of Cowles and Jones from 1920-1935 have continued to persist nearly eighty years after their discovery. Our relative strength momentum model increased returns by almost 3% per year. Now, instead of a $10,000 investment growing to $1,279,888 it grows to $3,943,884 over the same period. Many investors are unaware of how seemingly modest improvements in annualized return can make a meaningful difference over a long period of time to ending wealth. But we still have to deal with the pain factor (drawdowns), and our data shows that relative momentum does nothing to reduce bear market risk as maximum drawdown was essentially unchanged. We already know very few investors can take the punishment of a 55% drawdown and are normally advised to reduce equity market exposure in exchange for lower returning assets such as cash and bonds. Studies have shown how investors feel the pain of loss twice as strongly as the pleasure from an equivalent gain. Jason Zweig’s research found that financial losses are processed in the same part of the brain that responds to mortal danger. This is something we can’t ignore because the right investment plan for a prudent investor is the one they can stick with for the long term even if that results in a lower expected return. Investing heavily in equities and hoping that 50%+ bear market drawdowns won’t happen again is risky. The reason stocks tend to produce high long term rewards is because of their inherent risk. Bear markets will occur again, to think otherwise is ignoring history. More recently, researchers have been studying the benefits of combining relative momentum with what many practitioners call absolute momentum, or time-series momentum. Many commodity trading advisors (CTA’s) have been practicing absolute momentum in the form of trend following for decades with significant success. Absolute momentum acts as a risk management tool where you compare returns of an asset to itself instead of relative to other risk assets. For example, if US Stocks have a negative excess return over the prior twelve months there is also a strong likelihood of negative returns continuing in the near future. Buying tends to attract more buying just as selling attracts more selling. A sensible rules based approach is to then seek safety in the form of cash or high quality intermediate term bonds until stock returns again become positive over the prior year. So we will now combine relative momentum with absolute momentum where each month we chose among the two equity markets, and if neither have positive excess returns (asset return minus the risk free return of treasury bills) over the past year we will allocate to bonds for the next month instead. No predictions, opinions, or forecasts necessary. The fact that our model has no discretionary inputs is an important and refreshing distinction from traditional active portfolio management. Philip Tetlock spent two decades quantifying “expert” predictions finding that the vast majority performed worse than random chance when it came to predicting the likelihood of an outcome. Our dual momentum approach of combining relative and absolute momentum has outperformed our equally allocated global stock market benchmark by about 5% annually since 1971. This now grows a $10,000 investment to $10,722,164. But perhaps more important to most investors is that dual momentum reduced the maximum drawdown by more than half due to the effect of our absolute momentum rule partially sidestepping the three major equity bear markets of 1973-1974, 2000-2002, and 2008-2009. Dual momentum has shown the ability to be used as a simple rules-based method to produce higher returns with less risk than buy and hold. So what does this information mean to you? We wrote this paper to provide a simple example of one of our favorite methods we use within client portfolios. Most of our clients aren’t interested in every detail, only enough detail to increase investor confidence. As an independent investment advisory firm we have the freedom and flexibility to implement compelling research for our clients. Advisors captive to sales-based production requirements are often incentivized to provide proprietary products instead of conducting robust investment research that can benefit both the client and the advisor over the long term. This simple dual momentum method could also be a fantastic strategy for a portion of one’s 401k or other employer retirement accounts. On average, less than 2 trades occur per year so total time commitment may be around 5-10 minutes per month with most months requiring no action. More complex methodologies could certainly be pursued, but we believe simple beats complex over the long term. Leonardo da Vinci once said “Simplicity is the ultimate sophistication.” Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse manages the Steady Momentum service, and regularly incorporates options into client portfolios.

So I decided to check out one of the services reporting those remarkable returns. "Cumulative return"? Really? This service makes one trade per week, using weekly options expiring the same day. The way they present their results is "cumulative performance". They simply add the results of the individual trades together. While technically this is correct, does it mean anything? Would you be comfortable placing your whole portfolio into one weekly trade? When a newsletter claims a 1,000% return for the year, wouldn't you assume that if you started the year with $10,000 and invested in all the recommendations given on the site, they would now have $100,000? But this is not the case. A lot of services calculate their yearly return by adding together all the individual returns on each trade recommended for the year. And you can understand why a service would do that – it’s not only simple but, most importantly, it shows off their performance in the best possible light. Hey, if you could do just four trades per month and make 100% a month, why wouldn't you subscribe? Because you haven’t actually made 100%, that’s why. Not in the way that most people would think about trading or investment returns. In case of the described service, since those weekly trades are very risky, there is a significant amount of 100% losers. So realistically, you should not allocate more than 2% per trade with this strategy, and even this is a stretch. Are those returns live? To add insult to injury, it turns out that the website went public only in January 2015, but they present track record going back to October 2012. They assume (rightfully) that nobody in his right mind would pay over $1k/year for a service that exists only 3 months, but 2.5 years looks better, doesn't it? Of course the track record cannot be verified because the service did not even exist in 2012-2014, but how many people would be checking this? Humans desperately want to believe there is a way to make money with no or little risk. That’s why Bernie Madoff existed, and it will never change. You should always check if the reported results are live or backtested, by asking the services provider and/or checking the website creation date. The correct way to report returns SteadyOptions will always report our returns based on the whole account. The performance of the model portfolio reflects the growth of the entire account including the cash balance. Some services consider a $1,000 gain on a $1,000 investment to be a 100% return when the whole account is worth $10,000. SO considers this to be a 10% return — and that is the honest way of doing the calculations. There are a lot of other dirty tricks that some services use to push up their numbers. It might include reporting based on "maximum profit potential", calculating gains based on cash and not on margin etc. You can read my article Performance Reporting - The Myths And The Reality for full details. Still skeptical? Why not to take the SteadyOptions free trial and see by yourself how we are different from other services. Please refer to Frequently Asked Questions for more details about us. Related articles Can you double your account every six months? How to Calculate ROI in Options Trading Performance Reporting: The Myths and The Reality

There are many reasons to that. Barbara A. Friedberg mentions few of them: People lose money in the markets because they don’t understand economic and investment market cycles. People lose money in the markets because they let their emotions drive their investing. People lose money in the markets because they think investing is a get-rich-quick scheme. Some people will claim that it is related to lack of skills, poor risk management, poor selection of strategies etc. But the simple fact is that it is mostly related to human psychology and human emotions. Still need a proof? Fidelity Investments conducted a study on their Magellan fund from 1977-1990, during Peter Lynch’s tenure. His average annual return during this period was 29%. This is a remarkable return over the 13 year period. Given all that, you would expect that the investors in his fund made substantial returns over that period. However, what Fidelity Investments found in their study was shocking. The average investor in the fund actually lost money. How is it possible? Lynch himself pointed out a fly in the ointment. When he would have a setback, for example, the money would flow out of the fund through redemptions. Then when he got back on track it would flow back in, having missed the recovery. This isn't about trading skills. The only skill those investors needed was to stick around. But what they did basically was "buy high sell low". If this is not about human emotions, then I don't know what is. The main reasons for the poor performance of individual investors are: Human Psychology: Individuals make decisions everyday with their emotions assisting their judgment. Performance chasing: Investors who chase performance are highly likely to lose money over the long term. Casino Investing: Many people think they can make money by winning the lottery. The “me too” lemming investment strategy: This is a common strategy of people who don’t know what they are doing with their investments. Fear and Greed Investing: Those are the most powerful motivations for investors. Unfortunately, investors tend to alternate between these potentially destructive emotions. A recent Dalbar study showed how investors are their own worst enemy. From 1997 through 2016, the average active stock market investor earned 3.98 percent annually, while the S&P 500 index returned 10.16 percent in returns. The reasons are simple: Investors try to outsmart the markets by practicing frequent buying and selling in an attempt to make superior gains. Again, if anybody still needed proof that 90% of success in investing comes from human psychology, Fidelity and Dalbar studies provided that proof. Here is some advice from Barbara: To avoid losing money during a market-wide drop, your best bet is to just sit tight and wait for your investments to rebound. To avoid losing money in the markets, don’t follow the crowd and don’t buy into overvalued assets. Instead, create a sensible investment plan, and follow it. Don't follow the outrageous claims of penny stock and day-trading strategies. Similar behavior applies to trading services as well. As soon as a few losing trades and/or a drawdown of any kind occurs, some members hit the eject button and continue in their search for the Holy Grail strategy that always wins. They often come back after the next winning streak, missing the recovery. Isn't it the very definition of "Buy High, Sell Low"? Barbara A. Friedberg's final advice: To avoid losing money in the markets, tune out the outlandish investment pitches and the promises of riches. As in the fable of the Tortoise and the Hare, a “slow and steady” strategy will win out: Avoid the glamorous “can’t miss” pitches and strategies, and instead stick with proven investment approaches for the long term. Though you might lose a bit in the short-term, ultimately the slow-and-steady approach will win the financial race. Drawdowns are a fact of life for a trader. They happen. Big Drawdowns Are Part Of The Game. Apple, Amazon, Microsoft and Alphabet… All among the largest and most revered companies in the world. All have returned unfathomable amounts to their shareholders. All have experienced periods of tremendous adversity with large drawdowns. Apple investors from the IPO would experience two separate 82% drawdowns. Amazon experienced a 94% drawdown. Microsoft largest drawdown in history occurred over a 10 year period, a 70% decline from 1999 through 2009. Google had a 65% decline from 2007 through 2008. If you sold those amazing stocks during the drawdowns, you would miss their incredible gains. Conclusion There will be bad days and bad weeks and bad months, and periodically even a bad year. Focus on following your trading plan not the short term results of it. Robust strategies are profitable in the long term time frame. Please do not become part of the next Dalbar statistics. If you found a solid strategy, try to stick around. Related articles: Are You EMOTIONALLY Ready To Lose? Are You Ready For The Learning Curve? Why Retail Investors Lose Money In The Stock Market Why Simple Isn’t Easy Thinking In Terms Of Decades Can you double your account every six months? Learning To Win By Learning To Lose How To Avoid Emotional Mistakes In Trading 10,000 Hours Of Trading

This article was originally published in 2010 on Mark Wolfinger's blog, but it's relevant today more than ever. I've inserted my comments (in blue) amidst his advice. In my opinion, the suggestions offered represent the worst possible advice one can offer to an options trader. Especially when it's intended for a general audience. In my opinion, it imposes the wrong mindset (making profits is easy, picking market direction is easy, trading options is a simple game), giving those who follow the guru little chance of learning to use options profitably. Yes, that's a very strong statement. I believe options education must include information that gives the reader a reasonable chance to earn money. But no one hands that cash to you. It requires discipline, practice, and understanding what you are doing when making a trade. When you teach a beginner to buy options and predict direction, you set him/her on a path of financial ruin. The shameful part is that there's no warning of how difficult it is to earn money via this strategy. All our guru talks about is high leverage and the possibility of making big profits. There's no mention of the odds of succeeding. When we consider that traders who follow these suggestions probably lack much (if any) experience managing risk, it's a recipe for disaster The only redeeming virtue in this article is the recommendation to use only a modest portion your trading account. I have no idea of why Schaeffer's Investment Research believes that most traders can successfully predict market direction when the evidence is clear that professional money managers cannot do it (most mutual funds underperform their benchmark indexes). If this advice is not intended for the masses, but is specifically for people with a proven track record of beating the market, then I can forgive the advice. But when it is general advice offered to the masses, I must fight back. I know his readership is at least 10 (if not 50) times larger than mine, but I'm not willing to let his advice go without making an attempt to salvage the situation. The article: "The stock market gets no respect these days. On July 27, an article entitled "Ten Stock Market Myths That Just Won't Die" was featured in The Wall Street Journal. It attempted to debunk just about every reason your broker has ever given you for investing in stocks – from "investing in the stock market lets you participate in the growth of the economy," to "the market is really cheap right now," to "stocks outperform over the long term." Overall, it adopted a very cynical, negative view of the market." As well it should be. Too many brokers and other financial professionals are out to earn commissions, not to serve customers. Warnings are necessary. "If this article, which ends with the comment "In the long run, we are all dead," is your idea of helpful investment advice, then please read no further. But at the same time, if you're expecting me to try to "debunk the debunker" by giving you 10 reasons to be bullish on the market, then I have a surprise for you. While I do feel that the unprecedented rush to the exits by individual investors and the extremely negative press that has dogged this market since early 2009 will ultimately prove to be very effective contrarian indicators, I understand the frustrations investors feel with the post-"flash crash" market in all its high-volatility, directionless glory. Instead, my message to you is about avoiding these stock market frustrations and actually setting yourself up to make some money. I'm sure you understand this will not happen by you sitting in cash vehicles that guarantee you safety but pay you no return. You are being "rewarded" for the risk you are taking, and that reward is zero. But at the same time I'm not suggesting that your only alternative is putting your money in the market. What I'm in fact suggesting is that you commit a relatively modest portion of your capital to STRATEGIES designed to EXTRACT MONEY from the market, regardless of direction, or even if there is NO direction. And the only investment vehicle that can accomplish this for you is options." Committing only a modest amount of money makes sense. I can agree with that. Adopting strategies that are designed to extract money from the market also makes sense. However, isn't that the purpose of every strategy? The difficult part is knowing which strategies to adopt and when to use them. "So in the format of the aforementioned Wall Street Journal article, but with the goal of providing you with actionable information designed to grow your portfolio, allow me to list for you 10 reasons why you should be trading options right here and now. The calls in your options portfolio will allow you to achieve big leveraged gains if the market catches most investors by surprise and rallies through year-end" That's true. But the bigger truth is that you can readily lose 100% of the capital invested. Bernie, I admire the fact that you caution investors to use only a 'modest portion' of their portfolio for these plays, but they are still high risk plays that require accurate market prognostication. "The puts in your options portfolio will protect you against "flash crashes" and other disruptive market events and even allow you to profit in these situations." This is also true. Are you suggesting that buying both puts and calls gives your investor a good strategy for extracting money from the stock market? I believe it's far more likely to extract money from his/her investment account. As the 'flash crash' made obvious, it's not easy to get orders entered, and even more difficult to get them filled, during such an event. My conclusion is that another flash crash is unlikely, and preparing for it is a waste of time and money. Preparing for a true market debacle is another story, and being certain your portfolio is not decimated when that happens – makes sense. "You can still benefit from the unlimited profit potential of option buying yet limit your loss from any trade to 20-30%." Limit losses? Are you suggesting that option buyers unload their positions when losses reach that 20 to 30% limit? That hardly gives them a chance to profit if that 'big rally' doesn't begin pretty soon. Limiting losses is a fundamental aspect when trading, but not for the scenario you described. You want them to be involved if there is a rally through the end of the year, but you don't want them to own positions when losses exceed a designated limit. Those are conflicting goals. "You can profit from market volatility regardless of the direction of the price movement." You can lose from market stagnation, or reduced volatility – regardless of direction. "You can profit from buying calls on stocks that outperform, and at the same time buying puts on stocks that underperform their industry peers. That's the easy part." We all know how easy it is to pick which stocks will outperform. The proof is in the fact that each of your clients has already achieved multi-millionaire status and is heading towards the billionaire level. And your newsletter must be at least 95% accurate when picking direction. It's a cinch to do this. Just look at all the mutual funds – who pay big salaries for management personnel, and their track records. Hmmm…I must be missing something here. Those managers tend to underperform. But that's okay, I'm sure your customers are much better at picking direction than all those pros. "You can achieve huge leveraged gains by buying options during expiration week, when premiums are extremely low. And now, with the new Weekly Options, there is an expiration week every week." Wow. Yes indeed. Good thing you are so good at picking direction because the nay-sayers would tell you that's it's a great opportunity to lose 100% of your money in a hurry. Did you know that the 'extremely low' option prices are accompanied by exceptionally rapid time decay? I suspect you did know this, but chose not to mention it. Buying Weeklys? Leveraged profits are nice. What about 100% losses? Or do you stop yourself out of these trades after 2 days? "You can profit from the strong tendency of the market to trade in well-defined ranges most of the time with a carefully selected option premium selling program." Well, which is it? Are we to buy or sell these options? You must tell us now, before we actually go out and make the trades suggested earlier. Or is this another example of making option trades when we know how each stock is going to perform? "You can profit from the huge volatility around events like quarterly earnings reports." And do we do that by buying or selling the 'huge volatility' displayed prior to a news announcement? "You can profit by buying call options on stocks that are in long-term uptrends, at much lower dollar risk than buying the stock." Agree. I hope you are referring to ITM options, and not suggesting that traders buy OTM, or even ATM options. I assume that your readers are good at judging which stocks are in firm uptrends. "You can profit in all market environments by trading multiple option strategies on highly liquid exchange-traded funds on broad-market indexes, like the QQQQ." Okay, but you wanted investors to buy calls on the good stocks and puts on the decliners. How does trading an ETF allow for that? Now they must predict market direction for the whole market, rather than for individual stocks. So, does that mean all the advice given above is no longer valid? "In the long run we may all be dead, but we can make the most of the short run by looking to the options market for our trading opportunities." Yes Bernie, all those opportunities are present. But how do your readers know when to buy (or sell) puts or calls? You neglect that one little detail. Or are they supposed to buy your costly newsletters to get the answers? In my opinion, options are designed to reduce risk. Neither buying options nor selling naked options is the investing method that gives trades the best chance of success. A jackpot possibility – yes, it provides that. But that's no different from gambling and I'm disappointed that you shared these inconsistent thoughts with the world. "A good place for you to start might be our Options Center, where every trading day we slice and dice what's happening in the options market and its implications and where you can also find a wealth of options-based tools and filters and explanations of various options strategies." I truthfully don't know how good this information is. But, it may probably worth a look. Bottom line: This is the type of guru advice offered to the average options trader. This is the type of advice that gives options and options trading a bad name. If you want to gamble, follow the advice offered by our guru. If you want to use options with the chances of making a profit on your side, then understand how options work, make good trades, and carefully manage risk. Related articles Why You Should NOT Trust Investment Gurus 10 Signs Of A Fake Guru 3 Words You Won't Hear On CNBC Do You Need A Lawyer? I Don't. SchoolofTrade: Another Guru Busted Want to learn how to trade successfully from real traders? Start Your Free Trial

What are Weekly Options? For those less familiar with options, they expire on the third Friday of every month. Weekly options, first introduced by CBOE in October 2005, are one-week options as opposed to traditional options that have a life of months or years before expiration. New series for Weekly options are listed each Thursday and expire the following Friday. Not every stock or index has weekly options. For those that do, it basically means that every Friday is an expiration Friday. That opens tremendous new opportunities but also introduces new risks which can be much higher than "traditional" monthly options. Let's see for example how you could trade Apple (AAPL) using weekly or monthly options. Are they cheap? Lets buy them. Apple took a hit after their recent rare earnings miss. Many people think that the selloff is overdone. They want to use the recent pullback as a buying opportunity. The stock closed at $585.16 on Friday, July 27, 2012. Looking at ATM (At The Money) options, we can see that August 18 (monthly) calls can be purchased at $10.10. That would require the stock to close above $595 by August 18 just to break even. However, the weekly options (expiring on August 3, 2012) can be purchased at $6.15. This is 40% cheaper and requires much smaller move. However, there is a catch. First, you give yourself much less time for your thesis to work out. Second and more importantly, the weekly options are much more exposed to the time decay (the negative theta). The theta is a measurement of the option's time decay. The theta measures the rate at which options lose their value, specifically the time value, as the expiration draws nearer. Generally expressed as a negative number, the theta of an option reflects the amount by which the option's value will decrease every day. When you buy options, the theta is your enemy. When you sell them, the theta is your friend. For the monthly 585 calls, the negative theta is -$0.22. That means that the calls will lose ~2.2% of their value every day all other factors equal. For the weekly calls, the negative theta is a whopping -$0.43 or 7% per day. And that number will accelerate as we get closer to the expiration day. You better be right, and you better be right quickly. Buying is too risky? Maybe selling is better? If this is the case you might say - why not to take the other side of the trade? Why not to use the accelerating theta and sell those options? Or maybe be less risky and sell a credit spread? A credit spread is when you sell an option and buy another option which is further from the underlying price to hedge the risk. Many options "gurus" ride the wave of the weekly options and describe selling of weekly options as a cash machine. They say that "It brings money into my clients account weekly. Every Sunday my clients access their accounts and see + + +.” They advise selling weekly credit spreads and present it as a "a safe option strategy because we’re combining an option purchase with an option sale resulting with a credit into your account". This strategy can work very well.. until it doesn't. Imagine for example someone selling a 133/134 SPY credit spread on Thursday with SPY below $132. That seems like a pretty safe trade, isn't it? After all, we have just one day, what could possibly go wrong? The options will probably expire worthless and the clients will see more cash in their account by Sunday. Well, after the market close, good news from the EU summit took traders by surprise. The next day SPY opened above $135 and the credit spread has lost 100%. So much for the "safe strategy". By the way, this was a real trade recommendation from one of the options "gurus". He is charging $2,500 for his advice. So what is the biggest problem with selling the weekly options? The answer is the negative gamma. The gamma is a measure of the rate of change of its delta. The gamma of an option is expressed as a percentage and reflects the change in the delta in response to a one point movement of the underlying stock price. When you buy options, the gamma is your friend. When you sell them, the gamma is your enemy. When you are short weekly options (or any options which expire in a short period of time), you have a large negative gamma. Any sharp move in the underlying will cause significant losses, and there is nothing you can do about it. The Bottom Line So is the conclusion that you should not trade the weekly options? Not necessarily. They can be a good addition to a diversified options portfolio - as long as you are aware of the risks and allocate only small portion of the account to those trades. Link to the original article Related articles: The Options Greeks: Is It Greek To You? The Risks Of Weekly Credit Spreads Options Trading Greeks: Gamma For Speed Options Trading Greeks: Theta For Time Decay Why You Should Not Ignore Negative Gamma Make 10% Per Week With Weeklys? Want to learn how to reduce risk and put probabilities in your favor? Start Your Free Trial

Those who purchased the straddle a day before earnings more than tripled their money. However, for each buyer there is a seller. Those who sold those options (thinking that they are overpriced) got absolutely killed. They have lost almost $9,000 per contract. Well, of course not all of them - some of them sold those options as part of a hedge or maybe more complex trade, but you get the point. So what are the lessons here? First, NEVER ever sell naked options. Especially not before earnings. Especially not on stocks like GOOG, NFLX etc. that have a history of big moves. If you insist to sell premium, hedge yourself with further OTM options (creating an Iron Condor). Those who did it with Google, still lost 100% of the margin, but at least they knew their maximum risk in advance. Second, be aware that earnings are absolutely unpredictable. If you decide to play earnings, do it only with a small portion of your capital and pre-defined risk. Overall, options tend to be overpriced before earnings, and selling them with defined risk should produce good results over time - but you should always limit your loss and position sizing knowing that from time to time, there will be surprises. However, not all options are overpriced. There are some exceptions, and Google is one of them. Statistically, as I showed in my article, buying Google straddle a day before earnings would produce pretty good results. Options trading can be very lucrative, but you should always remember about the risks. And if you are playing earnings, the only risk management tool you have is position sizing. By the way, Google was not the only stock this week when the options market was terribly wrong about the potential move. Chipotle Mexican Grill (CMG) straddle was pricing a $28 move - in reality, the stock moved $70. Sandisk (SNDK) also moved almost double than the implied move. If you still believe that the markets are efficient, you live in a fantasy land.